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Mahesh Shah

Mahesh Shah

City: Mumbai

Joining Date: 22 Mar , 2011
Last Login: 02:14 PM - 19 Jul , 2013
IP Address of Last Login - 114.143.162.xxx
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Reply for: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:27 PM - Jul 19, 2013 ( )

Contents of this Note :



Key Investment Arguments In Favour & Against Shalimar Paints Ltd.

( Shalimar Paints Ltd. - Mcap – Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5




Why it Deserves to be a Part of One's Core Portfolio


Brief Overview

( India's 5th Largest Branded Paint Co. with 111 Years' Existence History & Most Credible Promoters )






Change in Management –

Most Extensive & Professional in Co.'s 111 Years' Long History

( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level)





Judicious Capacity Expansions over Last Decade

( Last 10 Years' Debt v/s Capacity Enhancement Record )




Huge Spare Land at Co.'s Manufacturing Locations

( Land in Possession v/s Land in Use at Each Location )






South Indian Greenfield Plant - Operational from Q2FY14

( 56 % Capacity Increase – Productwise Capacity Breakup at the Plant )






Regionwise Sales Breakup of Industrial & Decorative Paints

( Company v/s Industry )






Regionwise Production Capacity Breakup - Dedicated Industrial & Decorative Production

( with Sales Region Catered & Annual Revenue Generation Potential of each Manufacturing Plant )



Capacity Utilisation Schedule of Greenfield South Indian Plant

( FY14 to FY17 with ~Revenue Contribution each Fiscal )






Replacement Value of Tangible Fixed Assets

( Freehold Land Asset Value + Production Capacities' Value )






Replacement Value v/s Co.'s MCAP & EV

( Pure E.V. considered after including Off-BalanceSheet Debts )





Peer Valuation – Co. Trading at 67.8 % Discount – An Anomaly

( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel )




Conservative Financial Forecast

( FY14e, FY15e, FY16e alongwith Key Assumptions )




Conclusion

( Rare Undervalued Consumer Discretionary Play – Time to Have a Serious Relook )



Overview of Company & Industry

( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings )


Important Data Points

( Co.'s Past Decade's Financial Performance alongwith

Segmentwise Breakup of Revenues )



Key Monitorables

New Thread: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:27 PM - Jul 19, 2013 ( )

 http://www.scribd.com/doc/153871680


Attached is link to 34-pages Research Note on Shalimar Paints Ltd. [ NSE – SHALPAINTS ; BSE – 509874 ], India's Fifth Largest Branded Paint Company and one of the Oldest Paints Manufacturing Company of the World dating back its Brand inception to 1902 i.e. A Rare 111 Years' Long Existence History.

The company needs thoughtful consideration by any serious fund manager because of its Current Valuation on the Bourses being 28.66 % lower than even its Orderly Liquidation Value ( INR 259.37 cr. ) with its Tangible Fixed & Net Current Assets Value standing at INR 397.37 cr. as aginst current MCAP of the company at just INR 184.65 cr.

Possession of Huge Freehold Land ( ~67 acres ) with one key spare land parcel at the most sought after property location in Gurgaon ( Sector 32 ) limits the downside risk to current valuation considerably, while the recent Senior Management Change, with ex- Ingersoll Rand, Blue Dart honchos being inducted at seniormost level, offer possibility of multiple Valuation Upside Triggers starting 2HFY14. The senior management now stands thoroughly professional and reasonably dynamic – the best senior management structure company had in its 111 years' long existence history.

Operationalisation of Maiden South Indian Plant starting Q2FY14, which will enhance the production capacities of the company by 56 %, ensures the much needed 20 % p.a. Revenue Growth Visibility for the Company for atleast next three fiscals, whereas, Company's current Positioning in Decorative Paints segment wherein it derives 66 % of its revenues from Industry's Weakest Sales regions ( North & East ) ensures Significant Marketshare Capture by the company in Industry's strongest Sales regions ( South & West ) once its pan-India Manufacturing Presence gets established post Operationalisation of said South Indian plant.

Reasonable Scale of Operations at INR 594 cr. (FY14e) with FY16e INR 882 cr. coupled with consistent Profitability Track-Record with improving EBITDA & PAT Margins make the company a compelling relook candidate ; with its status of being the only Branded Paint company of India available at reasonable valuations which are at an average 67.78 % discount to all peers make it hard to ignore by any prudent fund manager.

 

http://www.scribd.com/doc/153871680

 

 

-------------------------------

Key Investment Arguments In Favour of Shalimar Paints Ltd. :

 

 

  • INR 397.37 cr.

    being the Value of Tangible Fixed & Net Current Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

 

  • INR 287.58 cr.

    being the Value of Tangible Fixed Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 177.58 cr.

    being the Value of Freehold Land Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 259.37 cr. 259.37c.

    being the Liquidation Value ( Orderly ) of the Company as at 31st March 2013

v/s current MarketCap of the Company at INR 185 cr.

 

 

[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the company after selling all the assets at current market value and paying off all the debt/liabilities as at 31st March 2013 ]

 

 

 

 

  • 111 Years' Long continuous existence imparts strong Brand Credibility

 

 

 

 

  • Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)

 

 

 

 

  • India's Fifth Largest Branded Paint Company and One of the World's Oldest Organised Paint Company

 

 

 

 

  • Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India ) with High Promoter Holding ( 62.36 % ) & nil Pledge

 

 

 

 

  • Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level (CEO, MD, etc.) w.e.f. March'2013

 

  • Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India (Tamil Nadu)

 

 

  • Minimum 18.49 % CAGR in Revenues visible over next 3 years to take FY16e Revenues to INR 882 cr.

 

 

 

 

  • All the current Manufacturing Plants of the company operating at ~90% capacity utilisation since last few years.

 

 

 

 

  • Capacities getting enhanced by 56 % in FY14 – Single Largest Addition in Company's History

 

 

 

 

  • Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is likely to kick-in extensive operational efficiencies

 

 

 

 

  • Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) – An Anomaly, when gets corrected, could lead to substantial Rerating of the company on the bourses

     

    ( Trading at average 67.8 % Discount to All Peers )

 

 

 

 

  • Trading at :

    0.34 x Mcap/Sales TTM,

     

    0.58 x EV/Sales TTM,

     

    8.13 x EV/EBITDA TTM

     

    limiting Downsides Considerably with ample upside triggers already in place

 

 

 

 

 

 

 

 

 

Key Investment Arguments Against Shalimar Paints Ltd. :

 

 

  • External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent severe Rupee Depreciation threatens to put pressure on Paint companies' margins as 35 % of the Raw Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one of the worst phase in last decade.

 

 

 

  • Greenfield Project Commencement Risk in the form of company's maiden South Indian plant which is scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in commencement of this facility beyond Q3FY14 could put undue pressure on company's finances.

 

 

 

  • Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation costs associated with the said South-based facility. However, if the company manages to turn out a stable EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market participants.

 

 

 

 

 

  • Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because of lack of manufacturing presence in fastest growing paint consuming region 'South India'.

     

    Till date, South & West India is catered by only single manufacturing plant of the company based in West India which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower marketshare for the company in both the regions viz., South & West India.

     

    Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of dedicated region-specific manufacturing presence.

     

    Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based there, whereas, production of West India based plant which is so far getting diverted to address South Indian market will get freed up to cater to home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West India.

     

     

 

 

  • Relatively Weak Profit Margins. Company operates at one of the lowest EBITDA margins amongst all the peers. To cite -- average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company's FY13 EBITDA Margin of 7.17 % ( margin partially impacted by the fire accident at one of company's plant in Q4FY13 ).

     

    The main reasons for this is company's relatively lower scale of operation, lack of manufacturing presence across all sales regions of India, particulary South India as also higher contribution from low margin Industrial Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get addressed, but, it will take atleast two more years for margins to show any significant improvement. However, the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into consideration all the negative facts.

     



Reply for: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:25 PM - Jul 19, 2013 ( )

Contents of this Note :



Key Investment Arguments In Favour & Against Shalimar Paints Ltd.

( Shalimar Paints Ltd. - Mcap – Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5




Why it Deserves to be a Part of One's Core Portfolio


Brief Overview

( India's 5th Largest Branded Paint Co. with 111 Years' Existence History & Most Credible Promoters )






Change in Management –

Most Extensive & Professional in Co.'s 111 Years' Long History

( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level)





Judicious Capacity Expansions over Last Decade

( Last 10 Years' Debt v/s Capacity Enhancement Record )




Huge Spare Land at Co.'s Manufacturing Locations

( Land in Possession v/s Land in Use at Each Location )






South Indian Greenfield Plant - Operational from Q2FY14

( 56 % Capacity Increase – Productwise Capacity Breakup at the Plant )






Regionwise Sales Breakup of Industrial & Decorative Paints

( Company v/s Industry )






Regionwise Production Capacity Breakup - Dedicated Industrial & Decorative Production

( with Sales Region Catered & Annual Revenue Generation Potential of each Manufacturing Plant )



Capacity Utilisation Schedule of Greenfield South Indian Plant

( FY14 to FY17 with ~Revenue Contribution each Fiscal )






Replacement Value of Tangible Fixed Assets

( Freehold Land Asset Value + Production Capacities' Value )






Replacement Value v/s Co.'s MCAP & EV

( Pure E.V. considered after including Off-BalanceSheet Debts )





Peer Valuation – Co. Trading at 67.8 % Discount – An Anomaly

( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel )




Conservative Financial Forecast

( FY14e, FY15e, FY16e alongwith Key Assumptions )




Conclusion

( Rare Undervalued Consumer Discretionary Play – Time to Have a Serious Relook )



Overview of Company & Industry

( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings )


Important Data Points

( Co.'s Past Decade's Financial Performance alongwith

Segmentwise Breakup of Revenues )



Key Monitorables

Reply for: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:25 PM - Jul 19, 2013 ( )

Contents of this Note :



Key Investment Arguments In Favour & Against Shalimar Paints Ltd.

( Shalimar Paints Ltd. - Mcap – Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5




Why it Deserves to be a Part of One's Core Portfolio


Brief Overview

( India's 5th Largest Branded Paint Co. with 111 Years' Existence History & Most Credible Promoters )






Change in Management –

Most Extensive & Professional in Co.'s 111 Years' Long History

( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level)





Judicious Capacity Expansions over Last Decade

( Last 10 Years' Debt v/s Capacity Enhancement Record )




Huge Spare Land at Co.'s Manufacturing Locations

( Land in Possession v/s Land in Use at Each Location )






South Indian Greenfield Plant - Operational from Q2FY14

( 56 % Capacity Increase – Productwise Capacity Breakup at the Plant )






Regionwise Sales Breakup of Industrial & Decorative Paints

( Company v/s Industry )






Regionwise Production Capacity Breakup - Dedicated Industrial & Decorative Production

( with Sales Region Catered & Annual Revenue Generation Potential of each Manufacturing Plant )



Capacity Utilisation Schedule of Greenfield South Indian Plant

( FY14 to FY17 with ~Revenue Contribution each Fiscal )






Replacement Value of Tangible Fixed Assets

( Freehold Land Asset Value + Production Capacities' Value )






Replacement Value v/s Co.'s MCAP & EV

( Pure E.V. considered after including Off-BalanceSheet Debts )





Peer Valuation – Co. Trading at 67.8 % Discount – An Anomaly

( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel )




Conservative Financial Forecast

( FY14e, FY15e, FY16e alongwith Key Assumptions )




Conclusion

( Rare Undervalued Consumer Discretionary Play – Time to Have a Serious Relook )



Overview of Company & Industry

( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings )


Important Data Points

( Co.'s Past Decade's Financial Performance alongwith

Segmentwise Breakup of Revenues )



Key Monitorables

New Thread: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:24 PM - Jul 19, 2013 ( )

 http://www.scribd.com/doc/153871680


Attached is link to 34-pages Research Note on Shalimar Paints Ltd. [ NSE – SHALPAINTS ; BSE – 509874 ], India's Fifth Largest Branded Paint Company and one of the Oldest Paints Manufacturing Company of the World dating back its Brand inception to 1902 i.e. A Rare 111 Years' Long Existence History.

The company needs thoughtful consideration by any serious fund manager because of its Current Valuation on the Bourses being 28.66 % lower than even its Orderly Liquidation Value ( INR 259.37 cr. ) with its Tangible Fixed & Net Current Assets Value standing at INR 397.37 cr. as aginst current MCAP of the company at just INR 184.65 cr.

Possession of Huge Freehold Land ( ~67 acres ) with one key spare land parcel at the most sought after property location in Gurgaon ( Sector 32 ) limits the downside risk to current valuation considerably, while the recent Senior Management Change, with ex- Ingersoll Rand, Blue Dart honchos being inducted at seniormost level, offer possibility of multiple Valuation Upside Triggers starting 2HFY14. The senior management now stands thoroughly professional and reasonably dynamic – the best senior management structure company had in its 111 years' long existence history.

Operationalisation of Maiden South Indian Plant starting Q2FY14, which will enhance the production capacities of the company by 56 %, ensures the much needed 20 % p.a. Revenue Growth Visibility for the Company for atleast next three fiscals, whereas, Company's current Positioning in Decorative Paints segment wherein it derives 66 % of its revenues from Industry's Weakest Sales regions ( North & East ) ensures Significant Marketshare Capture by the company in Industry's strongest Sales regions ( South & West ) once its pan-India Manufacturing Presence gets established post Operationalisation of said South Indian plant.

Reasonable Scale of Operations at INR 594 cr. (FY14e) with FY16e INR 882 cr. coupled with consistent Profitability Track-Record with improving EBITDA & PAT Margins make the company a compelling relook candidate ; with its status of being the only Branded Paint company of India available at reasonable valuations which are at an average 67.78 % discount to all peers make it hard to ignore by any prudent fund manager.

 

http://www.scribd.com/doc/153871680

 

 

-------------------------------

Key Investment Arguments In Favour of Shalimar Paints Ltd. :

 

 

  • INR 397.37 cr.

    being the Value of Tangible Fixed & Net Current Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

 

  • INR 287.58 cr.

    being the Value of Tangible Fixed Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 177.58 cr.

    being the Value of Freehold Land Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 259.37 cr. 259.37c.

    being the Liquidation Value ( Orderly ) of the Company as at 31st March 2013

v/s current MarketCap of the Company at INR 185 cr.

 

 

[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the company after selling all the assets at current market value and paying off all the debt/liabilities as at 31st March 2013 ]

 

 

 

 

  • 111 Years' Long continuous existence imparts strong Brand Credibility

 

 

 

 

  • Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)

 

 

 

 

  • India's Fifth Largest Branded Paint Company and One of the World's Oldest Organised Paint Company

 

 

 

 

  • Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India ) with High Promoter Holding ( 62.36 % ) & nil Pledge

 

 

 

 

  • Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level (CEO, MD, etc.) w.e.f. March'2013

 

  • Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India (Tamil Nadu)

 

 

  • Minimum 18.49 % CAGR in Revenues visible over next 3 years to take FY16e Revenues to INR 882 cr.

 

 

 

 

  • All the current Manufacturing Plants of the company operating at ~90% capacity utilisation since last few years.

 

 

 

 

  • Capacities getting enhanced by 56 % in FY14 – Single Largest Addition in Company's History

 

 

 

 

  • Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is likely to kick-in extensive operational efficiencies

 

 

 

 

  • Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) – An Anomaly, when gets corrected, could lead to substantial Rerating of the company on the bourses

     

    ( Trading at average 67.8 % Discount to All Peers )

 

 

 

 

  • Trading at :

    0.34 x Mcap/Sales TTM,

     

    0.58 x EV/Sales TTM,

     

    8.13 x EV/EBITDA TTM

     

    limiting Downsides Considerably with ample upside triggers already in place

 

 

 

 

 

 

 

 

 

Key Investment Arguments Against Shalimar Paints Ltd. :

 

 

  • External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent severe Rupee Depreciation threatens to put pressure on Paint companies' margins as 35 % of the Raw Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one of the worst phase in last decade.

 

 

 

  • Greenfield Project Commencement Risk in the form of company's maiden South Indian plant which is scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in commencement of this facility beyond Q3FY14 could put undue pressure on company's finances.

 

 

 

  • Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation costs associated with the said South-based facility. However, if the company manages to turn out a stable EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market participants.

 

 

 

 

 

  • Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because of lack of manufacturing presence in fastest growing paint consuming region 'South India'.

     

    Till date, South & West India is catered by only single manufacturing plant of the company based in West India which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower marketshare for the company in both the regions viz., South & West India.

     

    Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of dedicated region-specific manufacturing presence.

     

    Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based there, whereas, production of West India based plant which is so far getting diverted to address South Indian market will get freed up to cater to home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West India.

     

     

 

 

  • Relatively Weak Profit Margins. Company operates at one of the lowest EBITDA margins amongst all the peers. To cite -- average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company's FY13 EBITDA Margin of 7.17 % ( margin partially impacted by the fire accident at one of company's plant in Q4FY13 ).

     

    The main reasons for this is company's relatively lower scale of operation, lack of manufacturing presence across all sales regions of India, particulary South India as also higher contribution from low margin Industrial Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get addressed, but, it will take atleast two more years for margins to show any significant improvement. However, the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into consideration all the negative facts.

     

New Thread: Shalimar Paints Ltd -- Liquidation Value > MCAP - Views

Mahesh Shah at 02:23 PM - Jul 19, 2013 ( )

 http://www.scribd.com/doc/153871680


Attached is link to 34-pages Research Note on Shalimar Paints Ltd. [ NSE – SHALPAINTS ; BSE – 509874 ], India's Fifth Largest Branded Paint Company and one of the Oldest Paints Manufacturing Company of the World dating back its Brand inception to 1902 i.e. A Rare 111 Years' Long Existence History.

The company needs thoughtful consideration by any serious fund manager because of its Current Valuation on the Bourses being 28.66 % lower than even its Orderly Liquidation Value ( INR 259.37 cr. ) with its Tangible Fixed & Net Current Assets Value standing at INR 397.37 cr. as aginst current MCAP of the company at just INR 184.65 cr.

Possession of Huge Freehold Land ( ~67 acres ) with one key spare land parcel at the most sought after property location in Gurgaon ( Sector 32 ) limits the downside risk to current valuation considerably, while the recent Senior Management Change, with ex- Ingersoll Rand, Blue Dart honchos being inducted at seniormost level, offer possibility of multiple Valuation Upside Triggers starting 2HFY14. The senior management now stands thoroughly professional and reasonably dynamic – the best senior management structure company had in its 111 years' long existence history.

Operationalisation of Maiden South Indian Plant starting Q2FY14, which will enhance the production capacities of the company by 56 %, ensures the much needed 20 % p.a. Revenue Growth Visibility for the Company for atleast next three fiscals, whereas, Company's current Positioning in Decorative Paints segment wherein it derives 66 % of its revenues from Industry's Weakest Sales regions ( North & East ) ensures Significant Marketshare Capture by the company in Industry's strongest Sales regions ( South & West ) once its pan-India Manufacturing Presence gets established post Operationalisation of said South Indian plant.

Reasonable Scale of Operations at INR 594 cr. (FY14e) with FY16e INR 882 cr. coupled with consistent Profitability Track-Record with improving EBITDA & PAT Margins make the company a compelling relook candidate ; with its status of being the only Branded Paint company of India available at reasonable valuations which are at an average 67.78 % discount to all peers make it hard to ignore by any prudent fund manager.

 

http://www.scribd.com/doc/153871680

 

 

-------------------------------

Key Investment Arguments In Favour of Shalimar Paints Ltd. :

 

 

  • INR 397.37 cr.

    being the Value of Tangible Fixed & Net Current Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

 

  • INR 287.58 cr.

    being the Value of Tangible Fixed Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 177.58 cr.

    being the Value of Freehold Land Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 259.37 cr. 259.37c.

    being the Liquidation Value ( Orderly ) of the Company as at 31st March 2013

v/s current MarketCap of the Company at INR 185 cr.

 

 

[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the company after selling all the assets at current market value and paying off all the debt/liabilities as at 31st March 2013 ]

 

 

 

 

  • 111 Years' Long continuous existence imparts strong Brand Credibility

 

 

 

 

  • Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)

 

 

 

 

  • India's Fifth Largest Branded Paint Company and One of the World's Oldest Organised Paint Company

 

 

 

 

  • Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India ) with High Promoter Holding ( 62.36 % ) & nil Pledge

 

 

 

 

  • Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level (CEO, MD, etc.) w.e.f. March'2013

 

  • Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India (Tamil Nadu)

 

 

  • Minimum 18.49 % CAGR in Revenues visible over next 3 years to take FY16e Revenues to INR 882 cr.

 

 

 

 

  • All the current Manufacturing Plants of the company operating at ~90% capacity utilisation since last few years.

 

 

 

 

  • Capacities getting enhanced by 56 % in FY14 – Single Largest Addition in Company's History

 

 

 

 

  • Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is likely to kick-in extensive operational efficiencies

 

 

 

 

  • Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) – An Anomaly, when gets corrected, could lead to substantial Rerating of the company on the bourses

     

    ( Trading at average 67.8 % Discount to All Peers )

 

 

 

 

  • Trading at :

    0.34 x Mcap/Sales TTM,

     

    0.58 x EV/Sales TTM,

     

    8.13 x EV/EBITDA TTM

     

    limiting Downsides Considerably with ample upside triggers already in place

 

 

 

 

 

 

 

 

 

Key Investment Arguments Against Shalimar Paints Ltd. :

 

 

  • External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent severe Rupee Depreciation threatens to put pressure on Paint companies' margins as 35 % of the Raw Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one of the worst phase in last decade.

 

 

 

  • Greenfield Project Commencement Risk in the form of company's maiden South Indian plant which is scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in commencement of this facility beyond Q3FY14 could put undue pressure on company's finances.

 

 

 

  • Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation costs associated with the said South-based facility. However, if the company manages to turn out a stable EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market participants.

 

 

 

 

 

  • Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because of lack of manufacturing presence in fastest growing paint consuming region 'South India'.

     

    Till date, South & West India is catered by only single manufacturing plant of the company based in West India which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower marketshare for the company in both the regions viz., South & West India.

     

    Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of dedicated region-specific manufacturing presence.

     

    Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based there, whereas, production of West India based plant which is so far getting diverted to address South Indian market will get freed up to cater to home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West India.

     

     

 

 

  • Relatively Weak Profit Margins. Company operates at one of the lowest EBITDA margins amongst all the peers. To cite -- average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company's FY13 EBITDA Margin of 7.17 % ( margin partially impacted by the fire accident at one of company's plant in Q4FY13 ).

     

    The main reasons for this is company's relatively lower scale of operation, lack of manufacturing presence across all sales regions of India, particulary South India as also higher contribution from low margin Industrial Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get addressed, but, it will take atleast two more years for margins to show any significant improvement. However, the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into consideration all the negative facts.

     

Reply for: Shalimar Paints Ltd - Liquidation Value > MCAP - Views

Mahesh Shah at 02:20 PM - Jul 19, 2013 ( )

Contents of this Note :



Key Investment Arguments In Favour & Against Shalimar Paints Ltd.

( Shalimar Paints Ltd. - Mcap – Rs. 184 cr. with FY14e Revenues of Rs. 594 cr. ) Page 3-5




Why it Deserves to be a Part of One's Core Portfolio


Brief Overview

( India's 5th Largest Branded Paint Co. with 111 Years' Existence History & Most Credible Promoters )






Change in Management –

Most Extensive & Professional in Co.'s 111 Years' Long History

( Key ex- Ingersoll Rand, Blue Dart Express honchos inducted at Topmost Level)





Judicious Capacity Expansions over Last Decade

( Last 10 Years' Debt v/s Capacity Enhancement Record )




Huge Spare Land at Co.'s Manufacturing Locations

( Land in Possession v/s Land in Use at Each Location )






South Indian Greenfield Plant - Operational from Q2FY14

( 56 % Capacity Increase – Productwise Capacity Breakup at the Plant )






Regionwise Sales Breakup of Industrial & Decorative Paints

( Company v/s Industry )






Regionwise Production Capacity Breakup - Dedicated Industrial & Decorative Production

( with Sales Region Catered & Annual Revenue Generation Potential of each Manufacturing Plant )



Capacity Utilisation Schedule of Greenfield South Indian Plant

( FY14 to FY17 with ~Revenue Contribution each Fiscal )






Replacement Value of Tangible Fixed Assets

( Freehold Land Asset Value + Production Capacities' Value )






Replacement Value v/s Co.'s MCAP & EV

( Pure E.V. considered after including Off-BalanceSheet Debts )





Peer Valuation – Co. Trading at 67.8 % Discount – An Anomaly

( Asian Paints, Berger Paints, Kansai Nerolac & Akzo Nobel )




Conservative Financial Forecast

( FY14e, FY15e, FY16e alongwith Key Assumptions )




Conclusion

( Rare Undervalued Consumer Discretionary Play – Time to Have a Serious Relook )



Overview of Company & Industry

( Marketshare of Key Players, Segmentation of Industry & Co.'s Offerings )


Important Data Points

( Co.'s Past Decade's Financial Performance alongwith

Segmentwise Breakup of Revenues )



Key Monitorables

New Thread: Shalimar Paints Ltd - Liquidation Value > MCAP - Views

Mahesh Shah at 02:18 PM - Jul 19, 2013 ( )

http://www.scribd.com/doc/153871680

 
Attached is link to 34-pages Research Note on Shalimar Paints Ltd. [ NSE – SHALPAINTS ; BSE – 509874 ], India's Fifth Largest Branded Paint Company and one of the Oldest Paints Manufacturing Company of the World dating back its Brand inception to 1902 i.e. A Rare 111 Years' Long Existence History.

The company needs thoughtful consideration by any serious fund manager because of its Current Valuation on the Bourses being 28.66 % lower than even its Orderly Liquidation Value ( INR 259.37 cr. ) with its Tangible Fixed & Net Current Assets Value standing at INR 397.37 cr. as aginst current MCAP of the company at just INR 184.65 cr.

Possession of Huge Freehold Land ( ~67 acres ) with one key spare land parcel at the most sought after property location in Gurgaon ( Sector 32 ) limits the downside risk to current valuation considerably, while the recent Senior Management Change, with ex- Ingersoll Rand, Blue Dart honchos being inducted at seniormost level, offer possibility of multiple Valuation Upside Triggers starting 2HFY14. The senior management now stands thoroughly professional and reasonably dynamic – the best senior management structure company had in its 111 years' long existence history.

Operationalisation of Maiden South Indian Plant starting Q2FY14, which will enhance the production capacities of the company by 56 %, ensures the much needed 20 % p.a. Revenue Growth Visibility for the Company for atleast next three fiscals, whereas, Company's current Positioning in Decorative Paints segment wherein it derives 66 % of its revenues from Industry's Weakest Sales regions ( North & East ) ensures Significant Marketshare Capture by the company in Industry's strongest Sales regions ( South & West ) once its pan-India Manufacturing Presence gets established post Operationalisation of said South Indian plant.

Reasonable Scale of Operations at INR 594 cr. (FY14e) with FY16e INR 882 cr. coupled with consistent Profitability Track-Record with improving EBITDA & PAT Margins make the company a compelling relook candidate ; with its status of being the only Branded Paint company of India available at reasonable valuations which are at an average 67.78 % discount to all peers make it hard to ignore by any prudent fund manager.

 

----------------------------

Key Investment Arguments In Favour of Shalimar Paints Ltd. :

 

 

  • INR 397.37 cr.

    being the Value of Tangible Fixed & Net Current Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

 

  • INR 287.58 cr.

    being the Value of Tangible Fixed Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 177.58 cr.

    being the Value of Freehold Land Assets of the Company

v/s current MarketCap of the Company at INR 185 cr.

 

 

 

 

  • INR 259.37 cr. 259.37c.

    being the Liquidation Value ( Orderly ) of the Company as at 31st March 2013

v/s current MarketCap of the Company at INR 185 cr.

 

 

[ i.e., if the company had to sell-off in entirety, then, this is the value of cash ( 259.37 cr. ) that will be in hands of shareholders of the company after selling all the assets at current market value and paying off all the debt/liabilities as at 31st March 2013 ]

 

 

 

 

  • 111 Years' Long continuous existence imparts strong Brand Credibility

 

 

 

 

  • Huge Spare Freehold Land in Possession of the Company by virtue of its Long Existence with one spare land parcel ( 1 acre ) at a prime location in Gurgaon (Sector 32)

 

 

 

 

  • India's Fifth Largest Branded Paint Company and One of the World's Oldest Organised Paint Company

 

 

 

 

  • Credible Promoters in the form of Jhunjhnuwalas ( Ovolo Group, Hong Kong ) & Jindals ( Jindal Stainless, India ) with High Promoter Holding ( 62.36 % ) & nil Pledge

 

 

 

 

  • Change in Management with key ex- Ingersoll Rand, Blue Dart honchos inducted at Top Most Level (CEO, MD, etc.) w.e.f. March'2013

 

  • Clear Growth Visibility because of Operationalisation of maiden Paint Manufacturing Plant in South India (Tamil Nadu)

 

 

  • Minimum 18.49 % CAGR in Revenues visible over next 3 years to take FY16e Revenues to INR 882 cr.

 

 

 

 

  • All the current Manufacturing Plants of the company operating at ~90% capacity utilisation since last few years.

 

 

 

 

  • Capacities getting enhanced by 56 % in FY14 – Single Largest Addition in Company's History

 

 

 

 

  • Post 2HFY14, company to have Manufacturing Presence across India ( East, West, North & South ) which is likely to kick-in extensive operational efficiencies

 

 

 

 

  • Gross Undervaluation v/s All Peers ( Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel ) – An Anomaly, when gets corrected, could lead to substantial Rerating of the company on the bourses

     

    ( Trading at average 67.8 % Discount to All Peers )

 

 

 

 

  • Trading at :

    0.34 x Mcap/Sales TTM,

     

    0.58 x EV/Sales TTM,

     

    8.13 x EV/EBITDA TTM

     

    limiting Downsides Considerably with ample upside triggers already in place

 

 

 

 

 

 

 

 

 

Key Investment Arguments Against Shalimar Paints Ltd. :

 

 

  • External Risks in the form of Slowdown in Indian Industrial Activity as well as slowing Indian Consumer Discretionary Spends likely to take a toll on both, Industrial Paints as well as Decorative Paints Sales. Recent severe Rupee Depreciation threatens to put pressure on Paint companies' margins as 35 % of the Raw Materials are imported. Amidst these gloomy backdrop, Indian Paint Companies are today experiencing one of the worst phase in last decade.

 

 

 

  • Greenfield Project Commencement Risk in the form of company's maiden South Indian plant which is scheduled to get operational in Q2FY14. This is one of the largest greenfield capacity being set-up by the company in its history which is likely to increase its production capacities by ~56 %. Financial closure for this project was already achieved in Q3FY13 and construction work started in Q4FY13. Any delay in commencement of this facility beyond Q3FY14 could put undue pressure on company's finances.

 

 

 

  • Lumpiness in Quarterly Earnings as Q1FY14 & Q2FY14 could see dismal margin performance because of initial costs associated with greenfield manufacturing facility coming up in South India. Also, margin performance in whole FY14 could also remain subdued because of relatively higher finance and depreciation costs associated with the said South-based facility. However, if the company manages to turn out a stable EBITDA & PAT margin performance for FY14, then, it could very well be taken positively by the market participants.

 

 

 

 

 

  • Loss of Marketshare to competitors ; although, is highly unlikely, but still is a remote possibility. So far, since last decade, company has gradually lost its marketshare from 4.3 % in 2003 to current 3.1 % mainly because of lack of manufacturing presence in fastest growing paint consuming region 'South India'.

     

    Till date, South & West India is catered by only single manufacturing plant of the company based in West India which itself is operating at ~ 90 % capacity utilisation since last many years. This results in lower marketshare for the company in both the regions viz., South & West India.

     

    Notable here is that industry derives 60 % of its revenues from these two regions whereas company derives only 34 % of its revenues from South & West India mainly because of capacity constraints and lack of dedicated region-specific manufacturing presence.

     

    Hence, with operationalisation of South Indian manufacturing plant of the company from Q2FY14, its marketshare in both the regions ( South & West ) is likely to enhance significantly as from Q4FY14 onwards, once the new plant gets stabilised, South region will get catered to by the dedicated manufacturing plant based there, whereas, production of West India based plant which is so far getting diverted to address South Indian market will get freed up to cater to home market thereby making the company stronger in the strongest sales regions of the industry viz., South & West India.

     

     

 

 

  • Relatively Weak Profit Margins. Company operates at one of the lowest EBITDA margins amongst all the peers. To cite -- average FY13 EBITDA Margins of all the four peers is 11.78 % v/s Company's FY13 EBITDA Margin of 7.17 % ( margin partially impacted by the fire accident at one of company's plant in Q4FY13 ).

     

    The main reasons for this is company's relatively lower scale of operation, lack of manufacturing presence across all sales regions of India, particulary South India as also higher contribution from low margin Industrial Paints segment. With operationalisation of South Indian plant in Q2FY14, majority of these issues should get addressed, but, it will take atleast two more years for margins to show any significant improvement. However, the 67.78 % discount at which company is trading at v/s all its peers, more than captures such relatively weak operational parameters and the discount deserves to narrow down to atleast 50 % even after taking into consideration all the negative facts.

     

New Thread: Views on Relaxo Footwear -Management Meet+Research Note

Mahesh Shah at 03:02 PM - Jun 29, 2012 ( )

Link to 17-page Detailed Research Note on Relaxo Footwear Ltd.

http://www.scribd.com/doc/98164530

 

Link to Recent Management Meet Update on Relaxo Footwear Ltd. by Nirmal Bang Institutional Equities Research :

http://www.scribd.com/doc/98175248

 

---------------------------------------------

Attached is a 17-pages Research Note on Relaxo Footwear Ltd. [ NSE – RELAXO ; BSE – 530517 ], India's 2ndLargest Footwear company next to Bata India Ltd.. Also attached is the recent Management Meet Update from Nirmal Bang- Institutional Equities Research on the same company.

 

The company needs thoughtful consideration by any serious fund manager because of its consistent 20 % + RoE each year since last 5 years as also an exceptional growth track-record wherein company has increased its Sales at 5 Years' CAGR of 29,63 % and PAT at 5 Years CAGR of 45.54 %.

 

A complete, sea change, in marketing strategy of the company by recent engagement of top-notch celebrities like Salman Khan and Akshay Kumar to endorse its brands, print and media ads of which are to be aired from July'2012 onwards ; as also, substantial softening in key raw material prices (EVA & Rubber) are the factors that provide atleast a 3 years visibility of 20 % + p.a. Revenue growth with improving margins.

 

Reasonable Scale of Operations at INR 864 cr. (FY12) with debtor days at ~10 days signify a great brand-pull in the marketplace for company's key brands and inspite of that, the company quoting at substantial discount to Bata India Ltd. as also its smaller peer Liberty Shoes Ltd. necessitate a closer look at the company as an investment prospect.

 

Views are Invited from fellow members on this promising Indian Consumption Story.

 

Rgds.

 

Contents of this Note :

 

Key Investment Arguments In Favour & Against Relaxo Footwear Ltd.

( Relaxo Footwear Ltd. - Mcap – Rs. 580 cr. with FY13e Revenues of Rs. 1036 cr. ) Page 2-3

 

 

Why it Deserves to be a Part of One's Core Portfolio

Management Overview

( Core Professional Management )

 

3, 5, 10 & 15 Years' CAGR

( Revenue, EBITDA, PAT, Fixed Assets, Debt, Equity, Share Price )

 

Evolution of the Company

( From Trading to Marketing to Manufacturing to Branding to Retailing )

 

 

Last 5 Fiscals Performance post Launch of 'Sparx' and 'Flite' Brands ( Core Revenue, EBITDA & PAT alongwith each Fiscal's YoY Growth )

 

 

Brand-Specific Revenue Growth

( Hawaii, Flite & Sparx )

 

Brand-Specific Volume Growth

( Hawaii, Flite & Sparx )

 

Retail Stores Under Operation

( with Revenue Per Store Trend )

 

Exports' Revenue Growth

 

Assessment of Brand Marketing Effectiveness by Appeal of Celebrity Roped-In for Specific Brand

( Salman Khan for Hawaii & Akshay Kumar for Sparx )

 

Assessment of Quarterly Raw Material Price Fluctuations and its Effect on Company's Margins

( Actual From Q1FY10 till Q1FY13 and then Estimate for rest of FY13 )

 

Peer Comparison

( Bata India Ltd. & Liberty Shoes Ltd. )

 

Conclusion

( A Domestic Consumption Oriented Company on Verge of Significant Rerating )

 

Page 4-5

 

 

Page 5-6

 

 

Page 6-7

 

 

 

Page 7-8

 

 

 

Page 8-9

 

 

Page 9-10

 

 

Page 10-10

 

Page 10-11

 

 

 

Page 11-12

 

 

 

 

Page 12-15

 

 

Page 15-16

 

 

 

Page 17-17

contd... in 17-pages research note

New Thread: Relaxo Footwear Ltd -- Management Meet + Research Note

Mahesh Shah at 03:01 PM - Jun 29, 2012 ( )

Link to 17-page Detailed Research Note on Relaxo Footwear Ltd.

http://www.scribd.com/doc/98164530

 

Link to Recent Management Meet Update on Relaxo Footwear Ltd. by Nirmal Bang Institutional Equities Research :

http://www.scribd.com/doc/98175248

 

---------------------------------------------

Attached is a 17-pages Research Note on Relaxo Footwear Ltd. [ NSE – RELAXO ; BSE – 530517 ], India's 2ndLargest Footwear company next to Bata India Ltd.. Also attached is the recent Management Meet Update from Nirmal Bang- Institutional Equities Research on the same company.

 

The company needs thoughtful consideration by any serious fund manager because of its consistent 20 % + RoE each year since last 5 years as also an exceptional growth track-record wherein company has increased its Sales at 5 Years' CAGR of 29,63 % and PAT at 5 Years CAGR of 45.54 %.

 

A complete, sea change, in marketing strategy of the company by recent engagement of top-notch celebrities like Salman Khan and Akshay Kumar to endorse its brands, print and media ads of which are to be aired from July'2012 onwards ; as also, substantial softening in key raw material prices (EVA & Rubber) are the factors that provide atleast a 3 years visibility of 20 % + p.a. Revenue growth with improving margins.

 

Reasonable Scale of Operations at INR 864 cr. (FY12) with debtor days at ~10 days signify a great brand-pull in the marketplace for company's key brands and inspite of that, the company quoting at substantial discount to Bata India Ltd. as also its smaller peer Liberty Shoes Ltd. necessitate a closer look at the company as an investment prospect.

 

Views are Invited from fellow members on this promising Indian Consumption Story.

 

Rgds.

 

Contents of this Note :

 

Key Investment Arguments In Favour & Against Relaxo Footwear Ltd.

( Relaxo Footwear Ltd. - Mcap – Rs. 580 cr. with FY13e Revenues of Rs. 1036 cr. ) Page 2-3

 

 

Why it Deserves to be a Part of One's Core Portfolio

Management Overview

( Core Professional Management )

 

3, 5, 10 & 15 Years' CAGR

( Revenue, EBITDA, PAT, Fixed Assets, Debt, Equity, Share Price )

 

Evolution of the Company

( From Trading to Marketing to Manufacturing to Branding to Retailing )

 

 

Last 5 Fiscals Performance post Launch of 'Sparx' and 'Flite' Brands ( Core Revenue, EBITDA & PAT alongwith each Fiscal's YoY Growth )

 

 

Brand-Specific Revenue Growth

( Hawaii, Flite & Sparx )

 

Brand-Specific Volume Growth

( Hawaii, Flite & Sparx )

 

Retail Stores Under Operation

( with Revenue Per Store Trend )

 

Exports' Revenue Growth

 

Assessment of Brand Marketing Effectiveness by Appeal of Celebrity Roped-In for Specific Brand

( Salman Khan for Hawaii & Akshay Kumar for Sparx )

 

Assessment of Quarterly Raw Material Price Fluctuations and its Effect on Company's Margins

( Actual From Q1FY10 till Q1FY13 and then Estimate for rest of FY13 )

 

Peer Comparison

( Bata India Ltd. & Liberty Shoes Ltd. )

 

Conclusion

( A Domestic Consumption Oriented Company on Verge of Significant Rerating )

 

Page 4-5

 

 

Page 5-6

 

 

Page 6-7

 

 

 

Page 7-8

 

 

 

Page 8-9

 

 

Page 9-10

 

 

Page 10-10

 

Page 10-11

 

 

 

Page 11-12

 

 

 

 

Page 12-15

 

 

Page 15-16

 

 

 

Page 17-17

 contd... in 17-pages research note

New Thread: Views Invited on LG Balakrishnan Bros Ltd - Undervalued

Mahesh Shah at 10:27 AM - Apr 11, 2012 ( )

Link to 14-Page Detailed Research Note on the company -- http://www.scribd.com/doc/86996241

----------------------------

Views are invited on LG Balakrishnan & Bros Ltd. [ NSE – LGBBROSLTD ; BSE – 500250 ], India's Largest Manufacturer of Chains/Sprockets enjoying 65 % Marketshare in OEM Market & 50 % Marketshare in Replacement Market and growing at 25 % + p.a. since last two years with a CAGR of past 20 Years at 16.12 % generating RoE of 26 % + & RoCE of 22 % +.

 

Strong Relationships with OEM clients like Honda Motorcycles ( 70 % requirement catered by the company ), Bajaj Auto ( 65 % requirement catered by the company ), TVS ( 60 % requirement catered by the company), Hero MotoCorp, Yamaha, Harley Davidson, BMW, Ashok Leyland, ZF & Eaton ; Past 2 Decades' Track-Record of not only maintaining but infact enhancing Marketshare with strong focus on R&D ; Exceptional precedents in Minority Shareholders' Wealth Creation with 4 Bonus Issues ( 76.6 % of present paid-up equity capital because of bonus issues ) and Consistent High Dividend Payment every year since last 30 Years; as also Compelling Valuations with MarketCap at just INR 243 cr. v/s FY12e Revenues of INR 910 cr. and FY13e Revenues of INR 1055 cr. ; P/E multiple at 5.29 v/s historical average at 6.95 ; and Dividend Yield at 3.87 % on FY12e, are some of the factors necessitating a closer look at the company.

 

Included in the attached Research Note is detailed segmentation of Indian Chains/Sprockets Market, Expected Replacement Time for Two Wheeler Units sold in last 8 years from FY05 till 11'Months'FY12, Assessment of Company's Sales Growth v/s Industry Growth over last 8 years as well as Assessment of Debt Profile of the Company over last 20 years.

 

Please feel free to share your candid views on the company and get back to me in case of any query.

 

Rgds.

----------------------------------

 

 

Why LG Balakrishnan & Bros Ltd. deserves to be a part of one's core portfolio ? :

 

  1. When we evaluate any company for investment, there are many factors that we need to take into account, like :

 

  • Operating Segment Growth Prospects,

     

  • Company's Positioning in Operating Segment and whether such positioning is challengeable or not by any of the peer,

     

  • Scale of Operations of the Company

     

  • Management Quality & Credibility,

     

  • Past track-record of Management in their concern towards Minority Shareholders' Wealth Creation,

     

  • Effectiveness of Business Model of the Company,

     

  • Valuations at which the company is available, whether it offers scope for decent capital appreciation while at the same time providing reasonable amount of safety as far as Capital Preservation is concerned.

 

If all of the above-stated factors turn in favour of a company and still its available at a valuation that can only be termed as 'Gross Undervaluation' then its a Rare Investment Opportunity and shrewd markets might not let it remain the one for too long. Let's briefly state below the factors present in LG Balakrishnan & Bros Ltd. (LGB) which make it a deserving candidate for inclusion in any prudent fund managers' core portfolio :

 

  • Operating Segment on verge of an Exponential Growth because of moderate OEM Growth projected in coming decade and Exponential Replacement Segment Growth imminent from the back-dated OEM Growth and the life of critical components (supplied by LGB) coming to an end (EOL) thereby requiring replacement,

     

  • Concentrated nature of Operating Segment with only 3 major Domestic Manufacturers,

     

  • Market Leadership position of the company in this concentrated Operating Segment with more than 60 % Marketshare with an established, more than 20 years' old, brand 'Rolon' in its kitty,

     

  • Company's track-record of over last 2 decades of not only maintaining market-leadership position but, infact, enhancing the marketshare vis-a-vis its competition,

     

  • Reasonable Scale of Operations with FY12e Revenues at INR 910 cr.,

     

  • Good & Credible Management with almost Spotless image as far as Corporate Governance Standards are concerned,

     

  • Track-record of management's Utmost concern towards Minority Shareholders' Wealth Creation with issuance of Bonus Shares four times in company's 55 Years' history and consistent high Dividend Payment (~20 % of PAT) every year since last 30 Years.

     

  • Unique & proven business model with successful past track-record of 2 decades with :

     

    Reasonable Debt-funded expansion ---

    --- Cash Generation arising out of Expansion ---

    --- Payback of Debt from Cash Generation.

     

    By following this model in a cyclical way (4-5 Years' Cycle), company has been able to grow its topline at a CAGR of 16.12 % over last 20 Years and at 13.12 % CAGR over last 10 Years. If we focus on EBITDA, then, company has grown its EBITDA at a CAGR of 13.85 % over last 20 Years and at a CAGR of 10.09 % over last 10 Years.

     

  • Least Equity-Issuance is done for achieving the exceptional growth as also funding any CAPEX over last 20 Years which is evident from the fact that out of entire present equity capital of 7.84 cr. (0.784 mn. shares), 76.6 % equity is because of bonus issues,

     

  • Inspite of all the positive factors as also a healthy dividend yield of 3.2 % on TTM basis and 3.8 % on FY12e basis , the company is available at historically low valuations as also at a significant discount to its only listed peer Tube Investment of India Ltd.- TII (even after considering TII's only Metal Formed division, viz. TIDC India's valuations)

 

Starting from now, we will discuss each of the factor in slight detail as follows :

 

  1. The first and foremost factor working in favour of LG Balakrishnan & Bros Ltd. (LGB) is its core operating segment viz., Two Wheeler Automotive Chains/Sprockets (reported in financials as 'Transmission' segment). Just to give a brief background, Chain/Sprocket set is the critical component of almost all two wheeler units which enables power transmission in the vehicle. Normal life of Chain/Sprocket set is 3 years or a vehicle run of 30,000 kms.. However, because of Indian environmental conditions which promote dust, muddy and slushy roads, Chain/Sprocket in Indian two wheelers near their EOL (end of life) in just 2.5 years or after a run of just 25,000 kms.

 

Before going further, its necessary to understand the segmentation of Automotive Chains/Sprockets market in India. Indian Automotive Chains/Sprockets market is catered to in two ways :

 

(a) OEM Segment – which includes sales to direct two wheeler manufacturing OEMs (Original Equipment Manufacturers) like Bajaj Auto, Hero Motocorp, Honda Motorcycle, TVS, Yamaha, Suzuki, etc. as they require Chain/Sprocket set for every two wheeler they manufacture and such requirement is completely outsourced i.e. they procure Chain/Sprocket set from LGB, TIDC & Rockman the only three major quality-certified Chain/Sprocket manufacturers of India.

 

(b) Replacement Segment – which includes the requirement because of end of life (EOL) of Chain/Sprocket set (usually 3 years/30,000 kms.) of two wheeler units already sold by OEMs. Replacement segment is catered in two ways, first,

  • via OEM ( called OE Spares ) wherein OEM directly supplies Chain/Sprocket sets to Replacement segment for its brand of two wheelers,

    and second,

     

  • via direct own dealer/distributor network of Chain/Sprocket manufacturing companies like LGB and TIDC. This also includes sales of imported chains as well as sales from unorganised segment.

 

60 % of the Replacement segment is catered to by OEMs wherein they themselves supply components (after buying directly from Chain/Sprocket manufacturing companies like LGB & TIDC) for their brands of two wheelers sold while the remaining 40 % replacement segment is catered directly by Chain/Sprocket manufacturing companies as also by imported chains and unorganised manufacturers.

 

 

 

 

  1. OEM segment i.e. Two wheeler industry is projected to grow at a CAGR of 10-12 % over next 5 years (source – March'2012 ICRA Report on Indian Auto Components Industry) and at a CAGR of 7 % over next 10 years (source – January'2012 Kotak Theme Report on Automobiles titled 'Sixth Gear'). Factors like low penetration of two wheelers in India as compared to other emerging countries, demographic profile of India which favour two wheeler as the most convenient transportation vehicle, low but rising income levels, traffic congestion in cities and large proportion of young population in India are likely to see these projected growth rate getting exceeded in times to come while providing least downside risk.

 

  1. Replacement segment is sitting on verge of a very healthy growth because of the huge 25 % and 27 % growth achieved by two wheeler industry in FY10 and FY11 respectively. This is because, even if we assume the normal lifespan of Chain/Sprockets at 3 years / 30,000 kms., then also from FY13 onwards we are going to atleast experience a 25 % growth rate in replacement segment for next two years. This growth rate has not considered the already huge total two wheeler units sold between FY05-FY08 at 3 cr. + which if gets included in the calculation, calls for an exponential jump in replacement segment going forward.

 

 

  1. Let us first consider here the positioning of LG balakrishnan & Bros Ltd. w.r.t. OEM segment to assess whether it is in a position to capitalise and outperform the projected growth rate of OEM segment (i.e. Two Wheeler industry) over next decade. LGB is a critical supplier to each and every two wheeler OEM of India enjoying a comfortable ~65 % marketshare in OEM segment (which includes OE Spares i.e. Replacement segment catered by OEM). This is the reason why LGB has consistently outperformed the industry growth rate except one or two fiscals when it was restricted by capacity constraints. Also, such a diverse customer base with a presence across all industry OEMs has enabled the company to benefit out of adjusting client-mix well thereby catering to high growth customer more than low growth customer in case of any moderation in demand. An apt example to this fact is the current year outperformance of LGB's transmission segment (Chains/Sprockets) wherein for 9'Months'FY12 , the segment has grown by 39.5 % vis-a-vis industry growth rate of 12.5 %. This outperformance is most probably because of higher contribution from briskly growing Honda Motorcycles (HMSI) as also higher contribution from replacement segment.

 

Let's enumerate here LGB's pure OEM sales growth i.e. growth in sales of Chains/Sprockets to OEMs (excluding Replacement Segment Sales & Export Sales) to assess in a more proper way whether LGB is in a position to outperform the industry growth rate or not. The data is available from FY04 onwards wherein we have given a CAGR of OEM growth (i.e. Industry growth) vis-a-vis CAGR of LGB's OEM sales growth for five fiscals from FY04 till FY08 and from FY09 onwards we have given separate growth rates each year. For the current 9'Months'FY12 pure OEM sales of LGB is unavailable and so entire transmission segment revenue growth rate (including Replacement Segment Sales and Exports Sales) is given for 9'Months'FY12.

 

 

Fiscal Year

OEM Sales Growth

[ i.e. Two Wheeler Industry Growth Rate ]

LGB's Chains/Sprockets Sales to OEM Growth Rate

 

 

 

9'Months' FY12

12.55 %

39.5 %

 

[ Overall Growth including Replacement & Exports Sales ]

 

FY11

27 %

45.99 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

FY10

25 %

31.68 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

 

FY09

5 %

11 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

FY04 to FY08

[ 5 Years' CAGR ]

8.8 %

29.7 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

 

 

  1. Replacement segment, which is on verge of an exponential growth going forward, is going to be the real growth driver for LGB in the years ahead. LGB caters to the replacement segment under its 'Rolon' brand of Chains as well as Chain/Sprocket kits. LGB is having a ~50 % marketshare of Replacement Segment as on date and has a strong distributor/dealer network across the entire country with strongest network in South India. The marketshare would have been even higher had the company not reduced its supply to replacement market between FY08 to FY10 because of rising demands of OEM and limited capacities to cater to entire demand. The reason for LGB maintaining as also enhancing its marketshare in Replacement Segment inspite of restrained supply in some years is because of its proven quality as well long durability of its products which is evident from the fact that many bike owners as well as bike service centres prefer LGB's 'Rolon' brand of chains as replacement over imported as well OEM stock chains.

 

Enumerated below is past two fiscals' LGB's overall transmission segment (which includes Chain/Sprocket sales to OEM, Replacement & Exports segments) revenue growth rates as also separate break-up of growth rates of LGB's transmission segment revenues w.r.t. OEM Sales Growth (Chain/Sprocket sold directly to OEMs), Replacement Segment Sales Growth (Chain/Sprocket sold directly to Replacement segment) and Exports Sales Growth (Chain/Sprocket sold in Exports markets) and pitched such growth rates against Two Wheeler industry growth rates.

 

 

Fiscal Year

Two Wheeler Industry Growth Rate

LGB's Growth in Sales to OEM

LGB's Growth in Sales to Replacement Market

LGB's Growth in Sales to Export Market

Overall LGB's Transmission (Chains/Sprockets) Segment Growth Rate

 

 

 

 

 

 

9' Months' FY12

12.55 %

 

-

-

-

39.5 %

FY 11

27 %

45.99 %

26.29 %

 

(- 42.7 %)

32.21 %

FY 10

25 %

31.68 %

7.03 %

 

 

(- 40.9 %)

16.8 %

[ Growth was Lower due to Divestment of Industrial Chains Division in FY09 as also Capacity Constraints ]

 

Three important things need to be noted from above

      • first, Company intentionally limited supplies to Replacement Segment between FY07 to FY10 because of limited capacities and increasing OEM demand

         

      • second, on similar lines, Company took its focus totally away from exports markets to channelise all its capacities towards rising domestic demand, and

         

      • third, in FY09, Company sold its Industrial Chains division to Renold, UK and that is the reason why the overall growth rate of FY10 looks muted. LGB is still present in Industrial Chains segment via its JV with Renold, UK wherein LGB holds a 25 % stake.

 

 

  1. It is worthwhile to compare here the growth rate of LGB's only listed peer viz., Tube Investments of India Ltd.'s Auotomotive Chain segment (catered via its division TIDC India) with that of LGB. Since the separate data of TIDC's Automotive Chain segment growth is available only for fiscal FY11 as also 9'Months'FY12 so have given those comparative growth rates only :

 

 

Fiscal Year

TIDC India's Overall Chains/Sprockets Sales Growth

LGB's Overall

Chains/Sprockets Sales Growth

 

 

 

9' Months' FY 12

26 %

39.5 %

 

FY 11

27.4 %

32.21 %

 

 

 

From above, it is evident that LGB has outperformed TIDC in last fiscal as well as this fiscal which signifies LGB's maintenance of marketshare as also enhancement of the same.

 

 

  1. Since we are talking here about the only formidable peer of LGB viz., TIDC, it is worthwhile to take into account the expansion plans of it in Automotive Chains segment. TIDC is expanding its Automotive Chains capacities by 20 % in this fiscal (FY12) and by 50 % in next fiscal which signifies the robust demand scenario likely in coming fiscals for the segment.

 

  1. Apart from Two Wheeler automotive chains, the recent project undertaken by LGB is the chains for Passenger Vehicles (PV) segment. Almost all of today's modern cars have started employing 'Silent Chains' in their construction instead of 'belt drives'. LGB has already developed Silent Chains this fiscal and has started supplying them to Replacement Market for testing potential of the product. The response has been good and soon company expects to forge partnerships with domestic car manufacturers and start supplying to them. This is the high potential area and if LGB succeeds in the same then it could catapult it into big league very fast.

 

  1. After discussing regarding 'Transmission' segment (i.e. Sales of Chain/Sprockets), let us turn our attention towards the other operating segment of LGB viz., 'Metal Forming' Division under which company manufactures Fine Blanked components as also has a dedicated Unit for supplying components to Bosch. Company is having the largest Fine Blanking capacities in India with its closest peer being IFB Industries and again TIDC India (Tube Investment of India's Division). Under this segment, LGB supplies two wheeler chassis components and engine components, four wheeler engine components, brake components and transmission parts.

 

  1. Metal Forming division, which has grown its topline at a CAGR of 13.19 % over last 5 years, is on verge of registering a robust growth in the years to come because of the recent significant order wins from Ashok Leyland, ZF , Eaton and Daimler to supply transmission parts for their vehicles.

 

  1. Company has reportedly entered into a long term agreement with Ashok Leyland for supply of transmission parts, the supply of which is likely to start from FY13 onwards. This relationship is tipped to have the potential to turn out very big on the lines of historical relationships that LGB has enjoyed with major Two Wheeler OEMs for supply of Automotive Chains.

 

  1. In March 2012, LGB has signed a Letter of Intent to acquire majority stake in a USA-based company manufacturing precision stamped parts. This acquisition, which is likely to conclude by July 2012, could throw open a lot of synergies with already existing largest domestic Fine Blanking operations of the company and open up the huge untapped USA market for LGB for its fine blanked products considering the fact that US Auto market has seen a significant revival in recent past.

 

  1. The third minor operating segment of the company is the authorised dealership of Tata Motors Ltd. for Tata LCVs under which it operates at 10 locations in Tamilnadu with 3-S (Sales, Service, Spares under one roof) facilities at 3 locations out of 10. The financials of this division are reported under 'Others' segment. Starting from Q4FY12, the 'Others' segment will also include the financials arising out of exclusive south distributorship of Top1 Oil Products (a USA based Lubricant Manufacturer) under which LGB will sell Top1 Oil's premium lubricants exclusively in South India (rights for Rest of India given to Lucas-TVS). These partnerships (Tata Motors & Top1 Oil) are formed to enable steady cash generation by fully utilising the already strong network LGB enjoys in South India.

 

  1. Now, after discussing regarding Operating Segments of LGB above, its time to turn our attention to most critical aspect of evaluating the company, viz., “Management Quality & their Concern towards Minority Shareholders' Returns”. As far as management quality is concerned, its headed by core technocrats with promoter/MD Mr. B. Vijayakumar being a Science Graduate by Education and an Automobile Engineer by Profession and his son, Mr. V. Rajvirdhan, the Executive Director of LGB, being an Engineering Graduate with Specialisation in Industrial Management. LGB is headed by CEO and Deputy Managing Director Mr. P. Prabakaran who himself is B.E. and has had a long association with LGB.

     

    Promoters enjoy a very respectable name in South India with MD Mr. B. Vijayakumar being responsible for single handedly developing 'Kari Motor Speedway' in Chettipalayam, Coimbatore in 2003 in the memory of Indian Motorsport legend S. Karivardhan and Mr. B Vijayakumar's father, Late L G Balakrishnan (the grandson of well known scientist GD Naidu) instrumental in creating and developing the brand image of ELGI group with other successful companies of the group being Elgi Equipments, LG Sports, Super Speeds, etc.

 

  1. After adjudging the quality, now comes the crucial part i.e. “Management's Concern towards Minority Shareholders' Returns”. In this, LGB promoters get a perfect 100 % score as their track-record of concern towards Minority Shareholders' Returns is indisputable. Four Bonus Issues in company's 55 years history and consistent high dividend payment (~20 % of PAT) each year since last more than 30 years speak highly of promoters willingness as well as concern towards creating company's Minority Shareholders' wealth. Let's first enumerate below the history of bonus issues and provide a glimpse of past decade's dividend payment track-record before going any further on this :

 

 

Bonus Issue Ratio

Fiscal Year

 

 

1 : 1

FY 04

1 : 4

FY 94

1 : 2

FY 82

1 : 1

FY 78

 

 

Fiscal Year

Actual Dividend %

Dividend Distribution

as % of PAT

 

 

 

FY 11

 

100 %

16.9 %

FY 10

 

65 %

20.93 %

FY 09

60 %

12 %

(PAT was higher because of Extraordinary Items)

FY 08

 

35 %

18.43 %

FY 07

 

50 %

18.2 %

FY 06

 

30 %

17.29 %

FY 05

30 %

38.08 %

(Special Interim Dividend was Paid for 50th Year)

FY 04

30 %

(on enhanced Capital after issuing 1:1 Bonus)

17.26 %

FY 03

 

55 %

22.64 %

FY 02

 

40 %

24.04 %

FY 01

 

35 %

21.07 %

 

 

From above, its evident that management has not skipped the dividend (and that too at a higher %) even in lean fiscals like FY08 and FY09 when industry suffered heavily because of degrowth. With a promoter holding of 51.8 %, such clean and shareholder-friendly attitude can be found in only select few Indian Top-Notch companies (like Infosys Technologies) and its rare to find such attitude in any mid-cap company management like LGB and that too with only 51.8 % promoter holding.

 

Its not only dividend payment track-record thats satisfying but also regular rewards in the form of issue of Bonus Shares that is heartening to see which is the reason why 76.6 % of present paid-up equity capital of the company is because of bonus issues.

 

 

 

  1. There has been least fresh equity issuances for fund-raising purpose in last 20 years except one minor rights issue (worth INR 5.62 cr.) in FY95 and dilution of 7 % equity to International Finance Corporation (for a consideration of INR 22 cr. at Rs. 398 per share) in FY07. Even with such low fund-raising via fresh equity issuance, company has been able to increase its scale of operations from INR 35.93 cr. in FY91 to INR 714.74 cr. in FY11 to current FY12e INR 910 cr.. Similarly, company has been able to increase its EBITDA from INR 4.74 cr. in FY91 to INR 63.46 cr. in FY11 to current FY12e INR 83 cr..

     

    Even if we assess company's debt profile to check whether company has been able to achieve the said growth in last 20 years by burdening the balance sheet with debt, the eyes again meet with a pleasant picture of reasonable debt on books at just INR 116.60 cr. in FY11 which is very small as compared to its present scale of operations at FY12e INR 910 cr. as also FY13e INR 83 cr. EBITDA. Infact, if we calculate here past 20 years' adjusted CAGR in Debt just for comparision purpose as also to assess how the management has been able to achieve and handle growth, we find that Debt of the company has shown a CAGR of 12.74 % over past 20 years as compared to Revenue CAGR of 16.12 % & EBITDA CAGR of 13.85 % over the same period. Similarly, if we look at past 10 years , then Debt of the company has shown a CAGR of 7.82 % as against Revenue CAGR of 13.12 % & EBITDA CAGR of 10.09 %. To continue, if we look here at recent past and consider past 3 fiscals whose financials are comparable on like-to-like basis (as before FY09, the financials included the figures of Industrial Chains and Forging businesses which were subsequently divested till FY09) then, over last 3 fiscals, Debt of the companty has shown a negative CAGR of 9.16 % as compared to positive CAGR in Revenue of 12.08 % & EBITDA of 17.55 %

 

 

 

10 Years

20 Years

3 Years

 

 

 

 

Revenue CAGR

 

13.12 %

16.12 %

12.08 %

EBITDA CAGR

 

10.09 %

13.85 %

17.55 %

Debt CAGR

7.82 %

12.74 %

 

(-9.16 ) %

 

 

One thing to note in above debt figures is that in FY08, company demerged its forging business into a separate listed entity viz., 'LGB Forge Ltd.' and because of said demerger, debt worth INR 80 cr. went off books of LG Blakarishnan & Bros Ltd. in FY08. However, such INR 80 cr. odd debt is still guaranteed by LG Balakrishnan & Bros Ltd. and is shown in books under 'Contingent Liabilities'. LGB Forge Ltd. was reeling under losses till FY11 because of interest payments and with recent Rights Issue, its expected to show turnaround in operations starting next fiscal onwards. Till LGB Forge becomes profitable and self-independent, LG Balakrishnan & Bros Ltd. is likely to continue guaranteeing the said INR 80 cr. odd loans. However, evenif we include the INR 80 cr. odd debt figure of LGB Forge onto LG Balakrishnan & Bros Ltd.'s debt calculations then also Debt of the company over last 3 fiscals has shown a CAGR of positive 9.06 % which is well below past 3 fiscals' Revenue CAGR of 12.08 % and EBITDA CAGR of 17.55 %.

 

 

  1. Now co

New Thread: Views Invited on LG Balakrishnan & Bros Ltd.

Mahesh Shah at 10:24 AM - Apr 11, 2012 ( )

Link to 14-Page Detailed Research Note on the company -- http://www.scribd.com/doc/86996241

----------------------------

Views are invited on LG Balakrishnan & Bros Ltd. [ NSE – LGBBROSLTD ; BSE – 500250 ], India's Largest Manufacturer of Chains/Sprockets enjoying 65 % Marketshare in OEM Market & 50 % Marketshare in Replacement Market and growing at 25 % + p.a. since last two years with a CAGR of past 20 Years at 16.12 % generating RoE of 26 % + & RoCE of 22 % +.

 

Strong Relationships with OEM clients like Honda Motorcycles ( 70 % requirement catered by the company ), Bajaj Auto ( 65 % requirement catered by the company ), TVS ( 60 % requirement catered by the company), Hero MotoCorp, Yamaha, Harley Davidson, BMW, Ashok Leyland, ZF & Eaton ; Past 2 Decades' Track-Record of not only maintaining but infact enhancing Marketshare with strong focus on R&D ; Exceptional precedents in Minority Shareholders' Wealth Creation with 4 Bonus Issues ( 76.6 % of present paid-up equity capital because of bonus issues ) and Consistent High Dividend Payment every year since last 30 Years; as also Compelling Valuations with MarketCap at just INR 243 cr. v/s FY12e Revenues of INR 910 cr. and FY13e Revenues of INR 1055 cr. ; P/E multiple at 5.29 v/s historical average at 6.95 ; and Dividend Yield at 3.87 % on FY12e, are some of the factors necessitating a closer look at the company.

 

Included in the attached Research Note is detailed segmentation of Indian Chains/Sprockets Market, Expected Replacement Time for Two Wheeler Units sold in last 8 years from FY05 till 11'Months'FY12, Assessment of Company's Sales Growth v/s Industry Growth over last 8 years as well as Assessment of Debt Profile of the Company over last 20 years.

 

Please feel free to share your candid views on the company and get back to me in case of any query.

 

Rgds.

----------------------------------

 

 

Why LG Balakrishnan & Bros Ltd. deserves to be a part of one's core portfolio ? :

 

  1. When we evaluate any company for investment, there are many factors that we need to take into account, like :

 

  • Operating Segment Growth Prospects,

     

  • Company's Positioning in Operating Segment and whether such positioning is challengeable or not by any of the peer,

     

  • Scale of Operations of the Company

     

  • Management Quality & Credibility,

     

  • Past track-record of Management in their concern towards Minority Shareholders' Wealth Creation,

     

  • Effectiveness of Business Model of the Company,

     

  • Valuations at which the company is available, whether it offers scope for decent capital appreciation while at the same time providing reasonable amount of safety as far as Capital Preservation is concerned.

 

If all of the above-stated factors turn in favour of a company and still its available at a valuation that can only be termed as 'Gross Undervaluation' then its a Rare Investment Opportunity and shrewd markets might not let it remain the one for too long. Let's briefly state below the factors present in LG Balakrishnan & Bros Ltd. (LGB) which make it a deserving candidate for inclusion in any prudent fund managers' core portfolio :

 

  • Operating Segment on verge of an Exponential Growth because of moderate OEM Growth projected in coming decade and Exponential Replacement Segment Growth imminent from the back-dated OEM Growth and the life of critical components (supplied by LGB) coming to an end (EOL) thereby requiring replacement,

     

  • Concentrated nature of Operating Segment with only 3 major Domestic Manufacturers,

     

  • Market Leadership position of the company in this concentrated Operating Segment with more than 60 % Marketshare with an established, more than 20 years' old, brand 'Rolon' in its kitty,

     

  • Company's track-record of over last 2 decades of not only maintaining market-leadership position but, infact, enhancing the marketshare vis-a-vis its competition,

     

  • Reasonable Scale of Operations with FY12e Revenues at INR 910 cr.,

     

  • Good & Credible Management with almost Spotless image as far as Corporate Governance Standards are concerned,

     

  • Track-record of management's Utmost concern towards Minority Shareholders' Wealth Creation with issuance of Bonus Shares four times in company's 55 Years' history and consistent high Dividend Payment (~20 % of PAT) every year since last 30 Years.

     

  • Unique & proven business model with successful past track-record of 2 decades with :

     

    Reasonable Debt-funded expansion ---

    --- Cash Generation arising out of Expansion ---

    --- Payback of Debt from Cash Generation.

     

    By following this model in a cyclical way (4-5 Years' Cycle), company has been able to grow its topline at a CAGR of 16.12 % over last 20 Years and at 13.12 % CAGR over last 10 Years. If we focus on EBITDA, then, company has grown its EBITDA at a CAGR of 13.85 % over last 20 Years and at a CAGR of 10.09 % over last 10 Years.

     

  • Least Equity-Issuance is done for achieving the exceptional growth as also funding any CAPEX over last 20 Years which is evident from the fact that out of entire present equity capital of 7.84 cr. (0.784 mn. shares), 76.6 % equity is because of bonus issues,

     

  • Inspite of all the positive factors as also a healthy dividend yield of 3.2 % on TTM basis and 3.8 % on FY12e basis , the company is available at historically low valuations as also at a significant discount to its only listed peer Tube Investment of India Ltd.- TII (even after considering TII's only Metal Formed division, viz. TIDC India's valuations)

 

Starting from now, we will discuss each of the factor in slight detail as follows :

 

  1. The first and foremost factor working in favour of LG Balakrishnan & Bros Ltd. (LGB) is its core operating segment viz., Two Wheeler Automotive Chains/Sprockets (reported in financials as 'Transmission' segment). Just to give a brief background, Chain/Sprocket set is the critical component of almost all two wheeler units which enables power transmission in the vehicle. Normal life of Chain/Sprocket set is 3 years or a vehicle run of 30,000 kms.. However, because of Indian environmental conditions which promote dust, muddy and slushy roads, Chain/Sprocket in Indian two wheelers near their EOL (end of life) in just 2.5 years or after a run of just 25,000 kms.

 

Before going further, its necessary to understand the segmentation of Automotive Chains/Sprockets market in India. Indian Automotive Chains/Sprockets market is catered to in two ways :

 

(a) OEM Segment – which includes sales to direct two wheeler manufacturing OEMs (Original Equipment Manufacturers) like Bajaj Auto, Hero Motocorp, Honda Motorcycle, TVS, Yamaha, Suzuki, etc. as they require Chain/Sprocket set for every two wheeler they manufacture and such requirement is completely outsourced i.e. they procure Chain/Sprocket set from LGB, TIDC & Rockman the only three major quality-certified Chain/Sprocket manufacturers of India.

 

(b) Replacement Segment – which includes the requirement because of end of life (EOL) of Chain/Sprocket set (usually 3 years/30,000 kms.) of two wheeler units already sold by OEMs. Replacement segment is catered in two ways, first,

  • via OEM ( called OE Spares ) wherein OEM directly supplies Chain/Sprocket sets to Replacement segment for its brand of two wheelers,

    and second,

     

  • via direct own dealer/distributor network of Chain/Sprocket manufacturing companies like LGB and TIDC. This also includes sales of imported chains as well as sales from unorganised segment.

 

60 % of the Replacement segment is catered to by OEMs wherein they themselves supply components (after buying directly from Chain/Sprocket manufacturing companies like LGB & TIDC) for their brands of two wheelers sold while the remaining 40 % replacement segment is catered directly by Chain/Sprocket manufacturing companies as also by imported chains and unorganised manufacturers.

 

 

 

 

  1. OEM segment i.e. Two wheeler industry is projected to grow at a CAGR of 10-12 % over next 5 years (source – March'2012 ICRA Report on Indian Auto Components Industry) and at a CAGR of 7 % over next 10 years (source – January'2012 Kotak Theme Report on Automobiles titled 'Sixth Gear'). Factors like low penetration of two wheelers in India as compared to other emerging countries, demographic profile of India which favour two wheeler as the most convenient transportation vehicle, low but rising income levels, traffic congestion in cities and large proportion of young population in India are likely to see these projected growth rate getting exceeded in times to come while providing least downside risk.

 

  1. Replacement segment is sitting on verge of a very healthy growth because of the huge 25 % and 27 % growth achieved by two wheeler industry in FY10 and FY11 respectively. This is because, even if we assume the normal lifespan of Chain/Sprockets at 3 years / 30,000 kms., then also from FY13 onwards we are going to atleast experience a 25 % growth rate in replacement segment for next two years. This growth rate has not considered the already huge total two wheeler units sold between FY05-FY08 at 3 cr. + which if gets included in the calculation, calls for an exponential jump in replacement segment going forward.

 

 

  1. Let us first consider here the positioning of LG balakrishnan & Bros Ltd. w.r.t. OEM segment to assess whether it is in a position to capitalise and outperform the projected growth rate of OEM segment (i.e. Two Wheeler industry) over next decade. LGB is a critical supplier to each and every two wheeler OEM of India enjoying a comfortable ~65 % marketshare in OEM segment (which includes OE Spares i.e. Replacement segment catered by OEM). This is the reason why LGB has consistently outperformed the industry growth rate except one or two fiscals when it was restricted by capacity constraints. Also, such a diverse customer base with a presence across all industry OEMs has enabled the company to benefit out of adjusting client-mix well thereby catering to high growth customer more than low growth customer in case of any moderation in demand. An apt example to this fact is the current year outperformance of LGB's transmission segment (Chains/Sprockets) wherein for 9'Months'FY12 , the segment has grown by 39.5 % vis-a-vis industry growth rate of 12.5 %. This outperformance is most probably because of higher contribution from briskly growing Honda Motorcycles (HMSI) as also higher contribution from replacement segment.

 

Let's enumerate here LGB's pure OEM sales growth i.e. growth in sales of Chains/Sprockets to OEMs (excluding Replacement Segment Sales & Export Sales) to assess in a more proper way whether LGB is in a position to outperform the industry growth rate or not. The data is available from FY04 onwards wherein we have given a CAGR of OEM growth (i.e. Industry growth) vis-a-vis CAGR of LGB's OEM sales growth for five fiscals from FY04 till FY08 and from FY09 onwards we have given separate growth rates each year. For the current 9'Months'FY12 pure OEM sales of LGB is unavailable and so entire transmission segment revenue growth rate (including Replacement Segment Sales and Exports Sales) is given for 9'Months'FY12.

 

 

Fiscal Year

OEM Sales Growth

[ i.e. Two Wheeler Industry Growth Rate ]

LGB's Chains/Sprockets Sales to OEM Growth Rate

 

 

 

9'Months' FY12

12.55 %

39.5 %

 

[ Overall Growth including Replacement & Exports Sales ]

 

FY11

27 %

45.99 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

FY10

25 %

31.68 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

 

FY09

5 %

11 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

FY04 to FY08

[ 5 Years' CAGR ]

8.8 %

29.7 %

 

[ Pure OEM Sales & doesn't include Replacement & Exports Sales ]

 

 

 

  1. Replacement segment, which is on verge of an exponential growth going forward, is going to be the real growth driver for LGB in the years ahead. LGB caters to the replacement segment under its 'Rolon' brand of Chains as well as Chain/Sprocket kits. LGB is having a ~50 % marketshare of Replacement Segment as on date and has a strong distributor/dealer network across the entire country with strongest network in South India. The marketshare would have been even higher had the company not reduced its supply to replacement market between FY08 to FY10 because of rising demands of OEM and limited capacities to cater to entire demand. The reason for LGB maintaining as also enhancing its marketshare in Replacement Segment inspite of restrained supply in some years is because of its proven quality as well long durability of its products which is evident from the fact that many bike owners as well as bike service centres prefer LGB's 'Rolon' brand of chains as replacement over imported as well OEM stock chains.

 

Enumerated below is past two fiscals' LGB's overall transmission segment (which includes Chain/Sprocket sales to OEM, Replacement & Exports segments) revenue growth rates as also separate break-up of growth rates of LGB's transmission segment revenues w.r.t. OEM Sales Growth (Chain/Sprocket sold directly to OEMs), Replacement Segment Sales Growth (Chain/Sprocket sold directly to Replacement segment) and Exports Sales Growth (Chain/Sprocket sold in Exports markets) and pitched such growth rates against Two Wheeler industry growth rates.

 

 

Fiscal Year

Two Wheeler Industry Growth Rate

LGB's Growth in Sales to OEM

LGB's Growth in Sales to Replacement Market

LGB's Growth in Sales to Export Market

Overall LGB's Transmission (Chains/Sprockets) Segment Growth Rate

 

 

 

 

 

 

9' Months' FY12

12.55 %

 

-

-

-

39.5 %

FY 11

27 %

45.99 %

26.29 %

 

(- 42.7 %)

32.21 %

FY 10

25 %

31.68 %

7.03 %

 

 

(- 40.9 %)

16.8 %

[ Growth was Lower due to Divestment of Industrial Chains Division in FY09 as also Capacity Constraints ]

 

Three important things need to be noted from above

      • first, Company intentionally limited supplies to Replacement Segment between FY07 to FY10 because of limited capacities and increasing OEM demand

         

      • second, on similar lines, Company took its focus totally away from exports markets to channelise all its capacities towards rising domestic demand, and

         

      • third, in FY09, Company sold its Industrial Chains division to Renold, UK and that is the reason why the overall growth rate of FY10 looks muted. LGB is still present in Industrial Chains segment via its JV with Renold, UK wherein LGB holds a 25 % stake.

 

 

  1. It is worthwhile to compare here the growth rate of LGB's only listed peer viz., Tube Investments of India Ltd.'s Auotomotive Chain segment (catered via its division TIDC India) with that of LGB. Since the separate data of TIDC's Automotive Chain segment growth is available only for fiscal FY11 as also 9'Months'FY12 so have given those comparative growth rates only :

 

 

Fiscal Year

TIDC India's Overall Chains/Sprockets Sales Growth

LGB's Overall

Chains/Sprockets Sales Growth

 

 

 

9' Months' FY 12

26 %

39.5 %

 

FY 11

27.4 %

32.21 %

 

 

 

From above, it is evident that LGB has outperformed TIDC in last fiscal as well as this fiscal which signifies LGB's maintenance of marketshare as also enhancement of the same.

 

 

  1. Since we are talking here about the only formidable peer of LGB viz., TIDC, it is worthwhile to take into account the expansion plans of it in Automotive Chains segment. TIDC is expanding its Automotive Chains capacities by 20 % in this fiscal (FY12) and by 50 % in next fiscal which signifies the robust demand scenario likely in coming fiscals for the segment.

 

  1. Apart from Two Wheeler automotive chains, the recent project undertaken by LGB is the chains for Passenger Vehicles (PV) segment. Almost all of today's modern cars have started employing 'Silent Chains' in their construction instead of 'belt drives'. LGB has already developed Silent Chains this fiscal and has started supplying them to Replacement Market for testing potential of the product. The response has been good and soon company expects to forge partnerships with domestic car manufacturers and start supplying to them. This is the high potential area and if LGB succeeds in the same then it could catapult it into big league very fast.

 

  1. After discussing regarding 'Transmission' segment (i.e. Sales of Chain/Sprockets), let us turn our attention towards the other operating segment of LGB viz., 'Metal Forming' Division under which company manufactures Fine Blanked components as also has a dedicated Unit for supplying components to Bosch. Company is having the largest Fine Blanking capacities in India with its closest peer being IFB Industries and again TIDC India (Tube Investment of India's Division). Under this segment, LGB supplies two wheeler chassis components and engine components, four wheeler engine components, brake components and transmission parts.

 

  1. Metal Forming division, which has grown its topline at a CAGR of 13.19 % over last 5 years, is on verge of registering a robust growth in the years to come because of the recent significant order wins from Ashok Leyland, ZF , Eaton and Daimler to supply transmission parts for their vehicles.

 

  1. Company has reportedly entered into a long term agreement with Ashok Leyland for supply of transmission parts, the supply of which is likely to start from FY13 onwards. This relationship is tipped to have the potential to turn out very big on the lines of historical relationships that LGB has enjoyed with major Two Wheeler OEMs for supply of Automotive Chains.

 

  1. In March 2012, LGB has signed a Letter of Intent to acquire majority stake in a USA-based company manufacturing precision stamped parts. This acquisition, which is likely to conclude by July 2012, could throw open a lot of synergies with already existing largest domestic Fine Blanking operations of the company and open up the huge untapped USA market for LGB for its fine blanked products considering the fact that US Auto market has seen a significant revival in recent past.

 

  1. The third minor operating segment of the company is the authorised dealership of Tata Motors Ltd. for Tata LCVs under which it operates at 10 locations in Tamilnadu with 3-S (Sales, Service, Spares under one roof) facilities at 3 locations out of 10. The financials of this division are reported under 'Others' segment. Starting from Q4FY12, the 'Others' segment will also include the financials arising out of exclusive south distributorship of Top1 Oil Products (a USA based Lubricant Manufacturer) under which LGB will sell Top1 Oil's premium lubricants exclusively in South India (rights for Rest of India given to Lucas-TVS). These partnerships (Tata Motors & Top1 Oil) are formed to enable steady cash generation by fully utilising the already strong network LGB enjoys in South India.

 

  1. Now, after discussing regarding Operating Segments of LGB above, its time to turn our attention to most critical aspect of evaluating the company, viz., “Management Quality & their Concern towards Minority Shareholders' Returns”. As far as management quality is concerned, its headed by core technocrats with promoter/MD Mr. B. Vijayakumar being a Science Graduate by Education and an Automobile Engineer by Profession and his son, Mr. V. Rajvirdhan, the Executive Director of LGB, being an Engineering Graduate with Specialisation in Industrial Management. LGB is headed by CEO and Deputy Managing Director Mr. P. Prabakaran who himself is B.E. and has had a long association with LGB.

     

    Promoters enjoy a very respectable name in South India with MD Mr. B. Vijayakumar being responsible for single handedly developing 'Kari Motor Speedway' in Chettipalayam, Coimbatore in 2003 in the memory of Indian Motorsport legend S. Karivardhan and Mr. B Vijayakumar's father, Late L G Balakrishnan (the grandson of well known scientist GD Naidu) instrumental in creating and developing the brand image of ELGI group with other successful companies of the group being Elgi Equipments, LG Sports, Super Speeds, etc.

 

  1. After adjudging the quality, now comes the crucial part i.e. “Management's Concern towards Minority Shareholders' Returns”. In this, LGB promoters get a perfect 100 % score as their track-record of concern towards Minority Shareholders' Returns is indisputable. Four Bonus Issues in company's 55 years history and consistent high dividend payment (~20 % of PAT) each year since last more than 30 years speak highly of promoters willingness as well as concern towards creating company's Minority Shareholders' wealth. Let's first enumerate below the history of bonus issues and provide a glimpse of past decade's dividend payment track-record before going any further on this :

 

 

Bonus Issue Ratio

Fiscal Year

 

 

1 : 1

FY 04

1 : 4

FY 94

1 : 2

FY 82

1 : 1

FY 78

 

 

Fiscal Year

Actual Dividend %

Dividend Distribution

as % of PAT

 

 

 

FY 11

 

100 %

16.9 %

FY 10

 

65 %

20.93 %

FY 09

60 %

12 %

(PAT was higher because of Extraordinary Items)

FY 08

 

35 %

18.43 %

FY 07

 

50 %

18.2 %

FY 06

 

30 %

17.29 %

FY 05

30 %

38.08 %

(Special Interim Dividend was Paid for 50th Year)

FY 04

30 %

(on enhanced Capital after issuing 1:1 Bonus)

17.26 %

FY 03

 

55 %

22.64 %

FY 02

 

40 %

24.04 %

FY 01

 

35 %

21.07 %

 

 

From above, its evident that management has not skipped the dividend (and that too at a higher %) even in lean fiscals like FY08 and FY09 when industry suffered heavily because of degrowth. With a promoter holding of 51.8 %, such clean and shareholder-friendly attitude can be found in only select few Indian Top-Notch companies (like Infosys Technologies) and its rare to find such attitude in any mid-cap company management like LGB and that too with only 51.8 % promoter holding.

 

Its not only dividend payment track-record thats satisfying but also regular rewards in the form of issue of Bonus Shares that is heartening to see which is the reason why 76.6 % of present paid-up equity capital of the company is because of bonus issues.

 

 

 

  1. There has been least fresh equity issuances for fund-raising purpose in last 20 years except one minor rights issue (worth INR 5.62 cr.) in FY95 and dilution of 7 % equity to International Finance Corporation (for a consideration of INR 22 cr. at Rs. 398 per share) in FY07. Even with such low fund-raising via fresh equity issuance, company has been able to increase its scale of operations from INR 35.93 cr. in FY91 to INR 714.74 cr. in FY11 to current FY12e INR 910 cr.. Similarly, company has been able to increase its EBITDA from INR 4.74 cr. in FY91 to INR 63.46 cr. in FY11 to current FY12e INR 83 cr..

     

    Even if we assess company's debt profile to check whether company has been able to achieve the said growth in last 20 years by burdening the balance sheet with debt, the eyes again meet with a pleasant picture of reasonable debt on books at just INR 116.60 cr. in FY11 which is very small as compared to its present scale of operations at FY12e INR 910 cr. as also FY13e INR 83 cr. EBITDA. Infact, if we calculate here past 20 years' adjusted CAGR in Debt just for comparision purpose as also to assess how the management has been able to achieve and handle growth, we find that Debt of the company has shown a CAGR of 12.74 % over past 20 years as compared to Revenue CAGR of 16.12 % & EBITDA CAGR of 13.85 % over the same period. Similarly, if we look at past 10 years , then Debt of the company has shown a CAGR of 7.82 % as against Revenue CAGR of 13.12 % & EBITDA CAGR of 10.09 %. To continue, if we look here at recent past and consider past 3 fiscals whose financials are comparable on like-to-like basis (as before FY09, the financials included the figures of Industrial Chains and Forging businesses which were subsequently divested till FY09) then, over last 3 fiscals, Debt of the companty has shown a negative CAGR of 9.16 % as compared to positive CAGR in Revenue of 12.08 % & EBITDA of 17.55 %

 

 

 

10 Years

20 Years

3 Years

 

 

 

 

Revenue CAGR

 

13.12 %

16.12 %

12.08 %

EBITDA CAGR

 

10.09 %

13.85 %

17.55 %

Debt CAGR

7.82 %

12.74 %

 

(-9.16 ) %

 

 

One thing to note in above debt figures is that in FY08, company demerged its forging business into a separate listed entity viz., 'LGB Forge Ltd.' and because of said demerger, debt worth INR 80 cr. went off books of LG Blakarishnan & Bros Ltd. in FY08. However, such INR 80 cr. odd debt is still guaranteed by LG Balakrishnan & Bros Ltd. and is shown in books under 'Contingent Liabilities'. LGB Forge Ltd. was reeling under losses till FY11 because of interest payments and with recent Rights Issue, its expected to show turnaround in operations starting next fiscal onwards. Till LGB Forge becomes profitable and self-independent, LG Balakrishnan & Bros Ltd. is likely to continue guaranteeing the said INR 80 cr. odd loans. However, evenif we include the INR 80 cr. odd debt figure of LGB Forge onto LG Balakrishnan & Bros Ltd.'s debt calculations then also Debt of the company over last 3 fiscals has shown a CAGR of positive 9.06 % which is well below past 3 fiscals' Revenue CAGR of 12.08 % and EBITDA CAGR of 17.55 %.

 

 

  1. Now co

New Thread: Views Invited on Jubilant Industries Ltd.

Mahesh Shah at 12:44 PM - Oct 10, 2011 ( )

Link to 18-page Research Note --  http://www.scribd.com/doc/66376263

 

Link to Annual Report (2011) --  http://www.scribd.com/doc/66376158

 

Link to CSR2011 Report (2011) --  http://www.scribd.com/doc/66376115

(Rated A+ - Audited by Ernst & Young)

 

 

Views are invited on Jubilant Industries Ltd. [ NSE – JUBLINDS ; BSE – 533320 ], a US$ 3 bn. Jubilant Bhartia Group company which counts amongst its group successful companies like Indian-listed Jubilant Foodworks, Jubilant Lifesciences and AIM-listed Jubilant Energy.

 

The most interesting aspect which compels to invite fellow members' views with an aim to understand the company better is its valuation at just INR 220.24 cr. vis-a-vis FY12e revenues of INR 854 cr. & FY13e revenues of INR 1125 cr.. Such valuations, even when the company enjoys not only domestic but a world-leadership status in each of the operational segments makes the company hard to ignore for any serious fund manager. An attempt is made to deal with each and every aspect in our research note inluding the critical parameters of peers like Pidilite, Wacker Chemie (Germany), Pantaloon, Shoppers Stop, Aditya Birla Retail, Reliance Retail, Bharti Retail, etc.

 

Annual Report (2011) of the company as well as latest CSR Report ( as per GRI Standards – Audited by Ernst & Young) are attached alongwith the Research Note for reference.

 

Please feel free to share your candid views and get back to me in case of any query.

 

 

Link to 18-page Research Note --  http://www.scribd.com/doc/66376263

 

Link to Annual Report (2011) --  http://www.scribd.com/doc/66376158

 

Link to CSR2011 Report (2011) --  http://www.scribd.com/doc/66376115

(Rated A+ - Audited by Ernst & Young)

 

 ----- Contents of Research Note ----
Glimpse at Financial Parameters & Positioning of the Company
( Jubilant Industries Ltd. - Mcap – Rs. 220.24 cr. with FY12e Revenues of Rs. 850 cr. ) Page 3-3


Why it Deserves to be a Part of One's Core Portfolio
( US$ 3 bn. Group, Management, Global Leadership, Brands, Niche Retail Play ) Page 4-7


Brief Overview of the Company Page 8-9


Brief Overview of Each of the Operational Segment :
Consumer Products
( Jivanjor Brand - 2nd Largest after Pidilite's Fevicol )

Food Polymers
( 2nd Largest in World after Wacker Chemie, Germany )

Latex
( Largest in India - 3rd Largest in World for VP Latex )

Agri Input
( Ramban Brand - 4th Largest in India )

Retail
( 2nd Largest in Bangalore – Top 10 in India )

Page 10-10


Page 10-11


Page 11-12


Page 12-13


Page 13-14




Valuation Commanded by Peer in Each of the Operational Segment
( RoE, RoCE, D/E, EV/EBITDA, P/E, EV/Sales, Mcap/Sales included )
{ Pidilite, Wacker Chemie, Apcotex, Khaitan, Liberty, Rama,
Pantaloon, Shoppers Stop, Trent } Page 14-15



Comprehensive Sum-of-the-Parts (SOTP) Valuation
( Existing Core Business Valuation = Rs. 259.3 cr. +
Retail Business Valuation 126 cr. = Rs. 385.3 cr. ) Page 16-17


Hypermarket Chains of India – All Major Chains Covered
( No. of Stores, Area Under Operation, FY11 Revenues, Same-Store-Sales Growth )
Pantaloon
( Big Bazaar )

Spencer Retail
( Hyper )

Reliance Retail
( Reliance Mart )

Trent
( Star Bazaar )

Bharti Retail
( EasyDay Market )

Aditya Birla Retail
( More )

Shoppers Stop
( Hypercity )

Max Retail
( SPAR )

Jubilant Industries
( Total ) Page 18-18

Rgds.

New Thread: Jubilant Industries -3 bn. US$ Group Backing -Undervalu

Mahesh Shah at 12:41 PM - Oct 10, 2011 ( )

Link to 18-page Research Note --  http://www.scribd.com/doc/66376263

 

Link to Annual Report (2011) --  http://www.scribd.com/doc/66376158

 

Link to CSR2011 Report (2011) --  http://www.scribd.com/doc/66376115

(Rated A+ - Audited by Ernst & Young)

 

 

Views are invited on Jubilant Industries Ltd. [ NSE – JUBLINDS ; BSE – 533320 ], a US$ 3 bn. Jubilant Bhartia Group company which counts amongst its group successful companies like Indian-listed Jubilant Foodworks, Jubilant Lifesciences and AIM-listed Jubilant Energy.

 

The most interesting aspect which compels to invite fellow members' views with an aim to understand the company better is its valuation at just INR 220.24 cr. vis-a-vis FY12e revenues of INR 854 cr. & FY13e revenues of INR 1125 cr.. Such valuations, even when the company enjoys not only domestic but a world-leadership status in each of the operational segments makes the company hard to ignore for any serious fund manager. An attempt is made to deal with each and every aspect in our research note inluding the critical parameters of peers like Pidilite, Wacker Chemie (Germany), Pantaloon, Shoppers Stop, Aditya Birla Retail, Reliance Retail, Bharti Retail, etc.

 

Annual Report (2011) of the company as well as latest CSR Report ( as per GRI Standards – Audited by Ernst & Young) are attached alongwith the Research Note for reference.

 

Please feel free to share your candid views and get back to me in case of any query.

 

 

Link to 18-page Research Note --  http://www.scribd.com/doc/66376263

 

Link to Annual Report (2011) --  http://www.scribd.com/doc/66376158

 

Link to CSR2011 Report (2011) --  http://www.scribd.com/doc/66376115

(Rated A+ - Audited by Ernst & Young)

 

----- Contents of Research Note ----
Glimpse at Financial Parameters & Positioning of the Company
( Jubilant Industries Ltd. - Mcap – Rs. 220.24 cr. with FY12e Revenues of Rs. 850 cr. ) Page 3-3


Why it Deserves to be a Part of One's Core Portfolio
( US$ 3 bn. Group, Management, Global Leadership, Brands, Niche Retail Play ) Page 4-7


Brief Overview of the Company Page 8-9


Brief Overview of Each of the Operational Segment :
Consumer Products
( Jivanjor Brand - 2nd Largest after Pidilite's Fevicol )

Food Polymers
( 2nd Largest in World after Wacker Chemie, Germany )

Latex
( Largest in India - 3rd Largest in World for VP Latex )

Agri Input
( Ramban Brand - 4th Largest in India )

Retail
( 2nd Largest in Bangalore – Top 10 in India )

Page 10-10


Page 10-11


Page 11-12


Page 12-13


Page 13-14




Valuation Commanded by Peer in Each of the Operational Segment
( RoE, RoCE, D/E, EV/EBITDA, P/E, EV/Sales, Mcap/Sales included )
{ Pidilite, Wacker Chemie, Apcotex, Khaitan, Liberty, Rama,
Pantaloon, Shoppers Stop, Trent } Page 14-15



Comprehensive Sum-of-the-Parts (SOTP) Valuation
( Existing Core Business Valuation = Rs. 259.3 cr. +
Retail Business Valuation 126 cr. = Rs. 385.3 cr. ) Page 16-17


Hypermarket Chains of India – All Major Chains Covered
( No. of Stores, Area Under Operation, FY11 Revenues, Same-Store-Sales Growth )
Pantaloon
( Big Bazaar )

Spencer Retail
( Hyper )

Reliance Retail
( Reliance Mart )

Trent
( Star Bazaar )

Bharti Retail
( EasyDay Market )

Aditya Birla Retail
( More )

Shoppers Stop
( Hypercity )

Max Retail
( SPAR )

Jubilant Industries
( Total ) Page 18-18

New Thread: Solar Industries Ltd. - Views Invited -Rare Combination

Mahesh Shah at 05:09 PM - Aug 23, 2011 ( )

Views Invited from fellow members on this company.....If anyone wants past annual reports or concall transcript (audio) I will be happy to provide them....


Why Solar Industries deserves to be a part of one's core portfolio :

(1) When we analyse any company for its prospect to be a part of our core portfolio, we normally do an assessment of three factors, viz.,

Past ( track-record ),

Present ( growth ),

Future ( Visibility ).

It is very rare that any company scores well (and not only well but infact very well) in all the three aspects and in addition also has :

a reasonably good quality clean management with

high promoter holding  ( 74.60 % with nil pledge ) as also

high institutional holding  ( 15.37 % ),

is a leader in its Operational Segment  and

has always operated at an EBITDA margin of 17 % + in its entire history,

has a RoE of 24.35 % and a RoCE of 25.56 % ,

has given an annual growth guidance of 30 % each year over coming 3 years and

is still available at resonable valuations of just 11.9 FY12e price-to-earning (p/e) multiple and 1.3 times market-cap-to-sales ratio.


(2) Solar Industries India Ltd. ( BSE- 532725 ; NSE – SOLARINDS ) is one such company and straightaway we will start with its assessment without discussing further.


(3) CAGR of  79.22 %  in Topline over the span of last 8 years is what is achieved by Solar Industries. If we look at just last five financial years, still, it has grown at a CAGR of  40.83 % and that too on a larger scale.


(4) The most significant point to note here is that the CAGR of 40.83 % in topline over last 5 years has been achieved with a corresponding 26 % CAGR in actual volumes of products of the company which is a very healthy sign and signifies expanding marketplace as also increasing market-share of Solar in the segment.


(5) EBITDA has grown at a CAGR of 94.65 % over the span of last 8 fiscal years while if we take into account last 5 fiscal years, EBITDA has grown at a CAGR of 55.82 %.


(5) PAT has grown at a CAGR of 94.99 % over the span of last 8 years and the same has grown at a CAGR of 58.69 % over the span of last 5 years.


(6) Quality of financials is healthy which is evident from the  highest tax paid  by the company in the industry ( at the rate of  35.5 % at PBT level  and  30.36 % at EBITDA level ).


(7) Effective Management of such healthy growth is evident from the gradual reduction of interest payment as % to EBITDA which has come down to 8.56 % (FY11),  consistent high RoE and RoCE over last 4 years which stands at  24.35 % and 25.56 % (FY11) respectively  as also reasonable balancing of growth and shareholder payback by ploughing back higher amount of cash generated in the initial years and gradual reduction in ploughed back money with simultaneous increase in Dividend payment over last two years. This also depicts the justice done with minority shareholders which is otherwise rare in a high promoter holding (74.6 %) company as promoters could have enjoyed the high dividend payment by sacrificing growth which is not done by the management of Solar as a result of which the company today is on verge of an expoenential growth phase even on such higher scale.


(8) The growth has also continued in Q1FY12  with a 49.9 % YoY rise in topline, 31.7 % YoY growth in EBITDA and 39 % YoY growth in PAT.


(9) The management has consistently achieved growth with a conservative approach towards leverage which is evident from the reasonably  healthy cash levels  company maintains throughout the business cycle as also  50 % under-utilisation of bank limits  granted to the company because of which its instruments command a healthy rating of  P1+ and AA- from CRISIL.


(10)  Companty has a planned CAPEX of Rs. 200 cr. over next two years including the current year which management is confident of financing purely with internal accruals without much increase in debt as also without any significant equity dilution.


(11)  With the planned CAPEX, management is confident of achieveing  30 % annual growth in topline with improving EBITDA margins each year over next three years  including FY12.


(12)  Now, let's assess Solar Industries' operational segment, its positioning in its operational segment as also future plans based on which management is confident of 30 % growth each year over coming 3 years.....Solar Industries operates in Explosives Industry which is dominated (domestic) by Orica (MNC), Gulf Oil, Indian Explosives and IBP in addition to Solar.


(13)  Solar Industries dominates the market at No.1 position with an approximate overall share of 22 % in domestic market. If we look more deeply into the sub-segments of main operational segment, then, Solar is No.1 in Cartridge Explosives, Detonating Fuse and Cast Booster and No.2 in Bulk Explosives and Detonators.


(14)  Company has always remained ahead of its peers by proactive and efficient strategy execution like backward integration into raw material manufacture (except AN) and bulk purchase and trading of main raw material AN (Ammonium Nitrate) which has given it a high operational efficiency and highest EBITDA margins in the industry  (only Orica which is MNC player in India enjoys such high EBITDA margins).


(15)  The operational segment enjoys high entry barriers like industrial license requirement, clearance requirement from Home Ministry and IB, etc. because of which there is least chance of much competition emerging in the segment. As far as growth and expansion of the market segment goes, it has a very bright prospect as each of the commodity like Cement, Steel as also Power indirectly require explosives. To elaborate, 1 MnT Cement requires 1.45 MnT Limestone while 1 MnT Limestone requires 166 MT Explosives; similarly, 1 MnT Steel requires 1.70 MnT Iron Ore while 1 MnT Iron Ore requires 200 MT Explosives; to add, Per Unit Thermal Power requires 0.74 Kgs Coal while 1.00 MnT Coal requires 1080 MT of Explosives. Hence, since domestic demand for Steel, Cement, Power and Coal is not expected to slowdown significantly in foreseeable future, demand for Explosives is set to show a growing trend in near future and exponential growth thereafter.


(16)  Coal sector is atpresent the largest consumer of Explosives domestically with 70 % of that consumed by Coal India. Solar Industries is the largest supplier of explosives to Coal India and already 2011-12 tender of Coal India is through in which Solar has garnered a 8-10 % growth over last year. The contract is immune to price fluctuations in raw material with a quarterly cost-escalation clause.


(17)  Derisked business model as well as proactive management quality is evident from the fact that Coal India which contrbuted more than 40 % to Solar Industries' revenue 5 years before is today, as of FY11, contributing only 24.79 %.


(18)  The most significant point to take note of in the business strategy  of Solar over last two years is its expansion into global marketplace and its robust growth there. Exports, which were insignificant before 3 years are today, as of FY11, contributing 13.53 %.


(19)  The growth in exports is likely to strengthen considerably in FY12 and FY13 as the current exports are on back of only one plant of the company being operational in Zambia (capacity – 10000 MT). Already in Q1FY12, another plant in Nigeria with similar capacity has become operational and is undergoing stabilisation and is expected to start production in Q2FY12. Construction on third plant at Turkey has commenced in the month of April 2011 and this plant in expected to start production in Q4FY12.


(20)  FY13 will be the blockbuster year as far as exports of the company are concerned and coming 3 years are expected to see an exponential jump in exports of Solar.


(21)  On the domestic front, company is planning to almost double the present capacity of each of its existing product in coming two years to cater to the rising demand of mining and infrastructure sectors.


(22)  Solar Industries also possesses a kind of Hidden Treasure in the form of its interest in two Coal Blocks, one located at Madanpur and another located at Bhatgaon. Madanpur Coal Block in which company has a 20 % interest is classified as 'No-Go' area and a new application is made with MOFE for clearance of the same. As far as Bhatgaon Coal Block is concerned in which company has a 24.5 % share, all the formalities including Public Hearing is complete and Rehabilitation & Resettlement has been accepted. The company has already submitted revised mine closure plan and final clearance from MOFE is expected shortly after which land acquisition and development work will commence. The production from Bhatgaon block is expected to commence from FY14.


(23)  In our valuation matrix we have not incorporated any upside arising out of any of the Coal Blocks that company has interest in and have only valued upsides from the core business of the company.


(24)  In another significant development which is expected to boost already high profits margins of Solar further going forward, in Q1FY12, companty has got 'Mega Project' status from the Government for its CAPEX at Nagpur. This status will entitle it to many tax benefits and management conservatively expects this development to   add ~Rs. 10 cr. at PBT level in FY12 itself.


 At current market price of Rs. 721, Solar Industries is available at a P/E of just 11.9 its FY12e earnings and at a mcap-to-sales of just 1.3 FY12e sales and at a P/E of just 9.6 and a mcap-to-sales of just 0.9 on FY13e numbers. A company with :

a RoE of 24.35 % ,

which has consistently demonstrated high growth rates with healthy EBITDA margins over last many years,

has just started scratching off huge international market by setting up manufacturing plants overseas without burdening balance sheet or any form of equity dilution,

has also forward integrated by investment into coal blocks and,

is also having a high promoter as well as institutional holding (combined comes to  89.97 %) and a low floating stock,

     should actually command a scarcity premium and the whiff of the smallest positive trigger could start-off a rerating process for this company.

 


Past Financials of Solar Industries
( alongwith key expenses as % of sales/ebitda/pat to assess earnings quality as also Last 5 Years RoE & RoCE to assess management quality )

FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
(Fig. in ` cr.)

 

 

 


Revenue
722.85
590.19
530.37
321.04
237.65
169.46
135.29
98.51
EBITDA
148.47
111.99
95.73
71.01
39.16
36.7
24.27
17.32
PAT
75.59
58.59
44.13
36.11
19.21
22.16
14.99
8.79

 

 

 

 

Dividend Declared
80 %
70 %
45 %
30 %
15 %
15 %
NA
NA
Div.Payout Ratio as % of PAT
18.31 %
20.68 %
17.65 %
14.34 %
13.48 %
11.68 %
NA
NA

 

 

 

 

Taxes Paid
(% of EBITDA)
45.09
(30.36 %)
32.19
(28.74 %)
21.89
(22.86 %)
18.81
(26.48 %)
8.66
(22.11 %)
8.02
(21.85 %)
4.01
(16.52 %)
NA
Interest Paid
(% of EBITDA)
12.75
(8.58 %)
13.35
(11.92 %)
23.48
(24.52 %)
10.55
(14.85 %)
7.16
(18.28 %)
3.3
(8.99 %)
2.38
(9.8 %)
NA

 

 

 

 

 

 

 

 

 

RoNW
(RoE)
24.35 %
22.43 %
20.24 %
19.61 %
11.75 %
NA
NA
NA
RoCE
25.56 %
24.36 %
22.14 %
21.68 %
13.19 %
NA
NA
NA

Reply for: Solar Industries Ltd. - Views Invited -Rare Combination

Mahesh Shah at 05:03 PM - Aug 23, 2011 ( )

Thanks..

New Thread: Solar Industries Ltd. - Views Invited -Rare Combination

Mahesh Shah at 12:32 PM - Aug 20, 2011 ( )

Views Invited from fellow members on this company.....If anyone wants past annual reports or concall transcript (audio) I will be happy to provide them....


Why Solar Industries deserves to be a part of one's core portfolio :

(1) When we analyse any company for its prospect to be a part of our core portfolio, we normally do an assessment of three factors, viz.,

Past ( track-record ),

Present ( growth ),

Future ( Visibility ).

It is very rare that any company scores well (and not only well but infact very well) in all the three aspects and in addition also has :

a reasonably good quality clean management with

high promoter holding  ( 74.60 % with nil pledge ) as also

high institutional holding  ( 15.37 % ),

is a leader in its Operational Segment  and

has always operated at an EBITDA margin of 17 % + in its entire history,

has a RoE of 24.35 % and a RoCE of 25.56 % ,

has given an annual growth guidance of 30 % each year over coming 3 years and

is still available at resonable valuations of just 11.9 FY12e price-to-earning (p/e) multiple and 1.3 times market-cap-to-sales ratio.


(2) Solar Industries India Ltd. ( BSE- 532725 ; NSE – SOLARINDS ) is one such company and straightaway we will start with its assessment without discussing further.


(3) CAGR of  79.22 %  in Topline over the span of last 8 years is what is achieved by Solar Industries. If we look at just last five financial years, still, it has grown at a CAGR of  40.83 % and that too on a larger scale.


(4) The most significant point to note here is that the CAGR of 40.83 % in topline over last 5 years has been achieved with a corresponding 26 % CAGR in actual volumes of products of the company which is a very healthy sign and signifies expanding marketplace as also increasing market-share of Solar in the segment.


(5) EBITDA has grown at a CAGR of 94.65 % over the span of last 8 fiscal years while if we take into account last 5 fiscal years, EBITDA has grown at a CAGR of 55.82 %.


(5) PAT has grown at a CAGR of 94.99 % over the span of last 8 years and the same has grown at a CAGR of 58.69 % over the span of last 5 years.


(6) Quality of financials is healthy which is evident from the  highest tax paid  by the company in the industry ( at the rate of  35.5 % at PBT level  and  30.36 % at EBITDA level ).


(7) Effective Management of such healthy growth is evident from the gradual reduction of interest payment as % to EBITDA which has come down to 8.56 % (FY11),  consistent high RoE and RoCE over last 4 years which stands at  24.35 % and 25.56 % (FY11) respectively  as also reasonable balancing of growth and shareholder payback by ploughing back higher amount of cash generated in the initial years and gradual reduction in ploughed back money with simultaneous increase in Dividend payment over last two years. This also depicts the justice done with minority shareholders which is otherwise rare in a high promoter holding (74.6 %) company as promoters could have enjoyed the high dividend payment by sacrificing growth which is not done by the management of Solar as a result of which the company today is on verge of an expoenential growth phase even on such higher scale.


(8) The growth has also continued in Q1FY12  with a 49.9 % YoY rise in topline, 31.7 % YoY growth in EBITDA and 39 % YoY growth in PAT.


(9) The management has consistently achieved growth with a conservative approach towards leverage which is evident from the reasonably  healthy cash levels  company maintains throughout the business cycle as also  50 % under-utilisation of bank limits  granted to the company because of which its instruments command a healthy rating of  P1+ and AA- from CRISIL.


(10)  Companty has a planned CAPEX of Rs. 200 cr. over next two years including the current year which management is confident of financing purely with internal accruals without much increase in debt as also without any significant equity dilution.


(11)  With the planned CAPEX, management is confident of achieveing  30 % annual growth in topline with improving EBITDA margins each year over next three years  including FY12.


(12)  Now, let's assess Solar Industries' operational segment, its positioning in its operational segment as also future plans based on which management is confident of 30 % growth each year over coming 3 years.....Solar Industries operates in Explosives Industry which is dominated (domestic) by Orica (MNC), Gulf Oil, Indian Explosives and IBP in addition to Solar.


(13)  Solar Industries dominates the market at No.1 position with an approximate overall share of 22 % in domestic market. If we look more deeply into the sub-segments of main operational segment, then, Solar is No.1 in Cartridge Explosives, Detonating Fuse and Cast Booster and No.2 in Bulk Explosives and Detonators.


(14)  Company has always remained ahead of its peers by proactive and efficient strategy execution like backward integration into raw material manufacture (except AN) and bulk purchase and trading of main raw material AN (Ammonium Nitrate) which has given it a high operational efficiency and highest EBITDA margins in the industry  (only Orica which is MNC player in India enjoys such high EBITDA margins).


(15)  The operational segment enjoys high entry barriers like industrial license requirement, clearance requirement from Home Ministry and IB, etc. because of which there is least chance of much competition emerging in the segment. As far as growth and expansion of the market segment goes, it has a very bright prospect as each of the commodity like Cement, Steel as also Power indirectly require explosives. To elaborate, 1 MnT Cement requires 1.45 MnT Limestone while 1 MnT Limestone requires 166 MT Explosives; similarly, 1 MnT Steel requires 1.70 MnT Iron Ore while 1 MnT Iron Ore requires 200 MT Explosives; to add, Per Unit Thermal Power requires 0.74 Kgs Coal while 1.00 MnT Coal requires 1080 MT of Explosives. Hence, since domestic demand for Steel, Cement, Power and Coal is not expected to slowdown significantly in foreseeable future, demand for Explosives is set to show a growing trend in near future and exponential growth thereafter.


(16)  Coal sector is atpresent the largest consumer of Explosives domestically with 70 % of that consumed by Coal India. Solar Industries is the largest supplier of explosives to Coal India and already 2011-12 tender of Coal India is through in which Solar has garnered a 8-10 % growth over last year. The contract is immune to price fluctuations in raw material with a quarterly cost-escalation clause.


(17)  Derisked business model as well as proactive management quality is evident from the fact that Coal India which contrbuted more than 40 % to Solar Industries' revenue 5 years before is today, as of FY11, contributing only 24.79 %.


(18)  The most significant point to take note of in the business strategy  of Solar over last two years is its expansion into global marketplace and its robust growth there. Exports, which were insignificant before 3 years are today, as of FY11, contributing 13.53 %.


(19)  The growth in exports is likely to strengthen considerably in FY12 and FY13 as the current exports are on back of only one plant of the company being operational in Zambia (capacity – 10000 MT). Already in Q1FY12, another plant in Nigeria with similar capacity has become operational and is undergoing stabilisation and is expected to start production in Q2FY12. Construction on third plant at Turkey has commenced in the month of April 2011 and this plant in expected to start production in Q4FY12.


(20)  FY13 will be the blockbuster year as far as exports of the company are concerned and coming 3 years are expected to see an exponential jump in exports of Solar.


(21)  On the domestic front, company is planning to almost double the present capacity of each of its existing product in coming two years to cater to the rising demand of mining and infrastructure sectors.


(22)  Solar Industries also possesses a kind of Hidden Treasure in the form of its interest in two Coal Blocks, one located at Madanpur and another located at Bhatgaon. Madanpur Coal Block in which company has a 20 % interest is classified as 'No-Go' area and a new application is made with MOFE for clearance of the same. As far as Bhatgaon Coal Block is concerned in which company has a 24.5 % share, all the formalities including Public Hearing is complete and Rehabilitation & Resettlement has been accepted. The company has already submitted revised mine closure plan and final clearance from MOFE is expected shortly after which land acquisition and development work will commence. The production from Bhatgaon block is expected to commence from FY14.


(23)  In our valuation matrix we have not incorporated any upside arising out of any of the Coal Blocks that company has interest in and have only valued upsides from the core business of the company.


(24)  In another significant development which is expected to boost already high profits margins of Solar further going forward, in Q1FY12, companty has got 'Mega Project' status from the Government for its CAPEX at Nagpur. This status will entitle it to many tax benefits and management conservatively expects this development to   add ~Rs. 10 cr. at PBT level in FY12 itself.


 At current market price of Rs. 721, Solar Industries is available at a P/E of just 11.9 its FY12e earnings and at a mcap-to-sales of just 1.3 FY12e sales and at a P/E of just 9.6 and a mcap-to-sales of just 0.9 on FY13e numbers. A company with :

a RoE of 24.35 % ,

which has consistently demonstrated high growth rates with healthy EBITDA margins over last many years,

has just started scratching off huge international market by setting up manufacturing plants overseas without burdening balance sheet or any form of equity dilution,

has also forward integrated by investment into coal blocks and,

is also having a high promoter as well as institutional holding (combined comes to  89.97 %) and a low floating stock,

     should actually command a scarcity premium and the whiff of the smallest positive trigger could start-off a rerating process for this company.

 


Past Financials of Solar Industries
( alongwith key expenses as % of sales/ebitda/pat to assess earnings quality as also Last 5 Years RoE & RoCE to assess management quality )

FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
(Fig. in ` cr.)

 

 

 


Revenue
722.85
590.19
530.37
321.04
237.65
169.46
135.29
98.51
EBITDA
148.47
111.99
95.73
71.01
39.16
36.7
24.27
17.32
PAT
75.59
58.59
44.13
36.11
19.21
22.16
14.99
8.79

 

 

 

 

Dividend Declared
80 %
70 %
45 %
30 %
15 %
15 %
NA
NA
Div.Payout Ratio as % of PAT
18.31 %
20.68 %
17.65 %
14.34 %
13.48 %
11.68 %
NA
NA

 

 

 

 

Taxes Paid
(% of EBITDA)
45.09
(30.36 %)
32.19
(28.74 %)
21.89
(22.86 %)
18.81
(26.48 %)
8.66
(22.11 %)
8.02
(21.85 %)
4.01
(16.52 %)
NA
Interest Paid
(% of EBITDA)
12.75
(8.58 %)
13.35
(11.92 %)
23.48
(24.52 %)
10.55
(14.85 %)
7.16
(18.28 %)
3.3
(8.99 %)
2.38
(9.8 %)
NA

 

 

 

 

 

 

 

 

 

RoNW
(RoE)
24.35 %
22.43 %
20.24 %
19.61 %
11.75 %
NA
NA
NA
RoCE
25.56 %
24.36 %
22.14 %
21.68 %
13.19 %
NA
NA
NA

 

 

 

 

 

New Thread: Views Invited on P.I. Industries (Concall Takeaways)

Mahesh Shah at 02:30 PM - Mar 22, 2011 ( )

Standard Chartered PE Backed Co. with an Order-Book of 1100 cr. & Unique Business Model
-----------------------------------

P.I. Industries Ltd. (Current MCap - Rs. 659 cr.), a Standard Chartered PE & Halcyon Resources backed company, is a Agri-Input & Custom Synthesis player which, because of its unique business model as well as its current CSM business order-book at 250 mn. US$, which is almost 5 times its current yearly revenue tick-rate of CSM business, deserved a closer look and so we have initiated detailed research on the company and as soon as we are done we will be coming out with detailed report on the same soon. We invite fellow analysts' members inputs on the company as complexities of the agri & csm business can be understood only by varying views.

In case you want annual reports of the company we can mail them as also we have the playback of the 74 minutes long concall held recently which can be provided on request....just for a quick update, in Jan2011 Sony has signed a collaborative R&D agreement with PI as also the MD of PI is presently Co-Chairman, CII National Council on Agriculture.
 
Your Valued Inputs on the company will be highly appreciated.


Brief Overview of the Company :

 P. I. Industries Ltd. (BSE – 523642) is a company engaged in two high-potential business segments viz. Agri-Inputs & Custom Synthesis (CSM). It derives its strength from its strong association with leading global innovator companies to whom it offers a unique no-conflict business model with utmost respect to IPs. The success of this business model is evident from the fact that 95 % of PI's CSM business comes from patented molecules and that too in early part of their lifecycle. Such early-stage association with global innovator companies makes PI their partner rather than a supplier which derisks its business to a great extent. Another aspect which makes the business model of PI (in CSM space) a relatively safe and derisked one is the fact that to most of its customers in CSM space, PI either is the only or one of the only two suppliers. Hence, the only risk that remains with PI is the delivery risk which is taken care of by the professional and efficient management at top assisted by the inputs from Standard Chartered PE (which currently holds 5 % stake in PI that is likely to be raised to 12-15 % by April 2010) and Halcyon Resources (founded by ex-KPMG, ex-Anderson  head Mr. Seshadri who himself holds 1.17 % stake in PI).

 In agri-input business too, PI adopts a very unique business model which is quite distinct from its peers. It derives its agri-input business model from its other segment viz., CSM wherein first it draws global innovator companies' molecules to CSM space and then, if the management feels that such innovative molecule also has a market potential in India, then it enters into an inlicensing arrangement with the respective global innovator company which not only enhances the trust of the customer but gives PI a privileged status in customer's business strategy. The success of this agri-input business model is evident from the performance of PI's flagship brand Nominee Gold, a rice herbicide, which was brought to India by PI via inlicensing arrangement with Japan's Kumiai Chemical. Within just one and a half year of Nominee's launch, it has attained brand leadership status in the respective category and is expected to contribute almost 20 % to the current FY11 agri-input business revenues of PI. Agri-input business model of PI derives its strength from its strong distribution network which is spread across 1500 + disributors and a pan-india reach to 25000 + retailers.

 Hence, with such a unique business model as well as its current CSM business order-book at 250 mn. US$, which is almost 5 times its current yearly revenue tick-rate of CSM business, PI Industries deserved a closer look and so we have initiated detailed research on the company and as soon as we are done we will be coming out with detailed report on the same soon. We invite fellow analysts' members inputs on the company as complexities of the agri & csm business can be understood only by varying views.
 
 In case you want annual reports of the company we can mail them as also we have the playback of the 74 minutes long concall held recently which can be provided on request....just for a quick update, in Jan2011 Sony has signed a collaborative R&D agreement with PI as also the MD of PI is presently Co-Chairman, CII National Council on Agriculture.... recently PI had a concall post Q3FY11 numbers and broad takeaways from that were :
 


Key Takeaways of Concall


(1) Company's Agri-input business has grown by 36 % in first nine months of FY11 which is the highest growth achieved amongst its listed peers.
 

(2) Its Nominee Gold herbicide which was launched last year is doing extremely well and is expected to become a blockbuster brand in few years in respective category.
 

(3) Inlicensing molecules currently constitute 30-35 % of the agri business which is expected to rise to 50 % in 2 years which will enable the co. to improve margins further.
 

(4) In Fy12, Co. is going to launch two molecules in agri segment (insecticides).
 

(5) In agri segment all its business is from retail and has no institutional contribution which is a unique model in the listed peer space.
 

(6) Agri segment is going to do very well in Q4FY11 as because of rains the season has got shifted to Q4.
 

(7) At present Insecticides contribute 50 % to the agri business, 30 % is contributed by herbicides while other agri-inputs contribute 20 % to the agri segment revenue.


(8) In custom synthesis space (CSM), PI is following a unique no-conflict business model which is somewhat similar to Divis.
 

(9) In the CSM space it is the only or one of the only two suppliers to its clients.
 

(10) Its CSM business has the provision to pass on raw material increase to the customer.
 

(11) In CSM, majority of its clients are from agrochemicals space at present but the mix is shifting to other sectors like imaging, electronics & pharma.
 

(12) 95 % of CSM business accrues from patented products and that too in their early lifecycle which makes PI the only company with such business model in India.
 

(13) Order book position at the end of Dec.2010 stands at 250 mn. US$ which is to be executed in 2-3.5 years.
 

(14) Its new plant for CSM business is expected to get operational by December 2011. With the existing capacity and the new plant, PI will be able to serve orders worth 700-750 cr. per year in CSM business at 100 % utilisation.


(15) CAPEX for the new plant is put at Rs. 125 cr. by FY12 & FY13 out of which 16-18 cr. has already been spent and initial works have started and the entire CAPEX requirement is to be met by internal accruals as well as out of the proceeds of sale of polymer business which will get concluded by 31st March 2011.


(16) In the first 9 months of FY11, 3 to 4 molecules in CSM business are commercialised and stabilised which has put slight pressure on the margins and the delivery offtake has started to pick-up in Q3FY11 wherein it has attained 100 % growth YoY. Q4 is expected to see similar performance for CSM business but the full benefit of the commercialised molecules is expected to be seen from FY12 onwards in which PI's CSM business is expected to grow significantly.
 

(17) There is usually a lag period between 3-6 months for the molecules to get commercialised and stabilised but once that happens the yields improve substantially and delivery offtake picks up.
 

(18) R&D capability of PI is getting recognised with Sony signing with it a collaborative R&D agreement for carrying out joint research on organic chemicals. This parternership is expected to put PI in the big league few years down the line.
 
(19) PI has sold off its polymer business to Rhodia and the funds raised out of the sale is to be utilised for the new plant which is being set-up for CSM business.
 

(20) Co. is operating at approx. EBITDA margins of 16.5 % in agri segment and 20 % in CSM business. For Q3FY11, Agri business contributed 85.80 cr. which is YoY growth of 15 % whereas CSM business contributed 87 cr. which entails to a YoY growth of 99.5 %. For 9 months ending Dec.2010, Agri Business contributed 305.1 cr. which is 36 % growth YoY whereas CSM business contributed 150.6 cr. which is 6 % growth YoY. The sluggish growth in CSM business is due to shift in delivery schedules in favour of second half and time taken for commercialisation of 3 molecules.
 

(21) Co. plans to continue its focus on innovative products in both of its operating business segments and wants to pitch itself as a pure R&D focussed co. in the years to come.
 

(22) Co. believes that the business model which it is following is unique in India and in such model initial scale-up might be slow but once a critical scale is achieved, the scale-up will be exponential with decent margins since it is the critical supplier for most of the products it serves.

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