Nothing comes easy. If it does, then something is definitely wrong.

Tuesday, December 4, 2012

Worth a read.

I came across this article and I really liked it. I thought I should share it with my readers. So here it is.

50 Unfortunate Truths about Investing:

Sorry but

(1) Saying "I'll be greedy when others are fearful" is much easier than actually doing it.

(2) The gulf between a great company and a great investment can be extraordinary.

(3) Markets go through at least one big pullback every year, and one massive one every decade. Get used to it. It's just what they do.

(4) There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.

(5) As Erik Falkenstein says: "In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling , chess, and investing: Beginners should focus on avoiding mistakes , experts on making great moves."

(6) There are tens of thousands of professional money managers. Statistically, a handful of them have been successful by pure chance. Which ones? I don't know, but I bet a few are famous.

(7) On that note, some investors who we call "legendary" have barely, if at all, beaten an index fund over their careers. On the Wall Street, big wealth isn't indicative of big returns.

(8) During recession, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know nothing about.

(9) The more comfortable an investment feels, the more likely you are to be slaughtered.

(10) Time-saving Tip: Instead of trading penny stocks, just light your money on fire.Same for leveraged ETF's.

(11) Not a single person in the world knows what the markets will do in the short run.
End of story.

(12) The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn't -- his are much bigger.

(13) You don't understand a big bank's balance sheet. The people running the place and their accountants don't, either.

(14) There will be 7-10 recessions over the next 50 years. Don't act surprised when they come.

(15) Thirty years ago, there was one hour of market TV per day. Today there's upwards of 18 hours. 

What changed isn't the volume of news, but the volume of drive.

(16) Warren Buffet's best returns were achieved when markets were much less competitive. It's doubtful anyone will ever match his 50 year record.

(17) Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.

(18) The more someone is on TV, the less likely his or her predictions are to come true. (U.C. Berkeley psychologist Phil Tetlock has data on this).

(19) Related: Trust on one who is on CNBC more than twice a week.

(20) The market doesn't care how much you paid for a stock. Or our house. Or what you think is a "fair" price.

(21) The majority of market news is not only useless, but also harmful to your financial health.

(22) Professional investors have better information and faster computers than you do. You will never beat them short- term trading. Don't even try.

(23) How much experience a money manager has doesn't tell you much. You can underperform the market for an entire career. And many have.

(24) The decline of trading costs is one of the worst things to happen to investors, as it made frequent trading possible. High transaction costs used to cause people to think hard before they acted.

(25) Professional investing is one of the hardest careers to succeed at, but it has low barriers to entry and requires no credentials. That creates legions of "experts" who have no idea what they are doing.
People forget this because it doesn't apply to many other fields.

(26) Most IPO's will burn you. People with more information than you have want to sell. Think about that.

(27) When someone mentions charts, moving averages, head-and-shoulders patterns, or resistance levels, walk away.

(28) The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011 according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come.

(29) The real interest rate on a 20-yr Treasuries is negative, and investors are plowing money into them. Fear can be a much stronger force than arithmetic.

(30) The book Where Are the Customers' Yachts? was written in 194, and most still haven't figured out that financial advisors don't have their best interest at heart.

(31) The low-cost index fund is one of the most useful financial inventions in history. Boring but beautiful.

(32) The best investors in the world have more of an edge in psychology than in finance.

(33) What markets do day to day is overwhelmingly driven by random chance.Ascribing explanations to short term moves is like trying to explain lottery numbers.

(34) For most, finding ways to save more money is more important than finding great investments.

(35) If you have credit card debt and are thinking about investing in anything, stop. You will never beat 30% annual interest.

(36) A large portion of share buybacks are just offsetting shares issued to management as compensation. Managers still tout the buybacks as "returning money to shareholders".

(37) The odds that atleast one well known company is insolvent and hiding behind fraudulent accounting are high.

(38) Twenty years from now the S&P 500 will look nothing like it does today. Companies die and new one emerge.

(39) Twelve years ago General Motors was on top of the world and Apple was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.

(40) Most would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president and focused on their own financial mismanagement.

(41) For many, a house is a large liability masquerading as a safe asset.

(42) The president has much less influence over the economy than people think.

(43) However much money you think you'll need for retirement, double it. Now you're closer to reality.

(44) The next recession is never like the last one.

(45) Remember what Buffett says about progress: "First come the innovators, then come the imitators, then come the idiots."

(46) And what Mark Twain says about truth: "A lie can travel halfway around the world while truth is putting on its shoes."

(47) And what Marty Whitman says about information: "Rarely do more than three or four variables really count. Everything else is noise."

(48) The bigger a merger is, the higher the odds it will be a flop. CEOs love empire building by overpaying for companies.

(49) Investments that offer little upside and big downside outnumber those with the opposite characteristics at least 10 - to - 1.

(50) The most boring companies - toothpaste, food, bolts - can make some of the best long- term investments. The most innovative, some of the worst.

Saturday, March 31, 2012

Educomp Solutions Limited (ESL) BSE Code: 532696 NSE Code: EDUCOMP


CMP (BSE): Rs. 193.20

CMP (NSE): Rs. 193.05

Industry: Education

India is blessed with a favourable demography and this demographic dividend has to be converted into a virtuous cycle of acceleration in growth and Education is one of the critical inputs to securing this demographic dividend.

Gone are the days when man had just 3 basic needs - Food, Shelter and Clothing. In today's competitive world, there is an addition to this basic needs, the 4th one being Education. Education is the backbone of any society or country. Infrastructure growth depends on efficient, effective educational system. In this era, where technology plays a vital role, Educomp Solutions Limited (ESL) is a result of efforts taken to combine technology and teaching & learning and be an integral part of it.

Educomp Solutions Limited (ESL), founded in 1994 is a globally diversified education solutions provider and the largest technology driven innovation education company in India. ESL empowers over 19.4 million learners and educators across 29000 schools (over 5.3 million students in over 10000 pvt schools and over 6 million students in over 11000 government schools) to imagine, think and create a better future. This makes ESL one of the largest education companies in the world, in terms of customer reach.

ESL today has 27 offices worldwide including an office each in Canada and Sri Lanka, two in Singapore, three in US and 20 in India. ESL runs over 840 pre-schools, 69 KG to 12th schools, seven colleges, one higher education campus, 343 vocational training centres, 74 test prep centres, and have around 4.2 million users of our online learning properties. ESL is India's leader of K-12 education, led by their competency in curriculum design and teacher education space to develop applications and products. It has always been in the forefront of creating unique innovative solutions for the Indian education market. Their presence in the education verticals is marked with technology-enabled products, high quality people, structured processes, and entrepreneurial leadership that come together to deliver unmatched value to their customers.

Educomp today reaches out to a total of ~15.5 million learners including 4.3 million in SmartClass, 5.8 million in ICT, 50,000 in pre-schools and 25,000 in the high school space. In addition to this, ESL has 339 centres for vocational and test preparation business, ~800 preschools, 56 operational high schools, 7 colleges and 2.9 million users of its various online businesses.

Certain facts about the Indian Education Sector:
  • FDI inflows in the education sector during the period April 2000 to September 2011, stood at USD 464.98 million, according to the Department of Industrial Policy and Promotion (DIPP).
  • According to 2011 census, the total literacy rate in India is 74.04%. The female literacy rate is 65.46% and male literacy rate is 82.14%.
  • The country has 544 university level institutions, which includes 261 state universities, 73 state private institutions, 42 central universities, 130 deemed universities, 33 institutions of national importance and five institutions established under various state legislations, according to the Ministry of Human Resource Development (HRD).
  • The country has around 79 centrally funded institutions, which includes 15 Indian Institutes of Technology (IIT's), 11 Indian Institutes of Management (IIM's) and 30 National Institutes of Technology (NIT's).

Investment Opportunities:
  • According to a report published by Grant Thorton, the primary and secondary education in India is expected to reach USD 50 billion in 2015 from USD 24.5 billion in 2008, growing at an estimated CAGR of 14%.
  • According to another report by Ernst & Young, the higher education sector in India is expected to witness a growth of 18% CAGR till 2020. At present, the sector witnesses spends of almost USD 10.4 billion.
  • The vocational segment has emerged as a USD 2.6 billion market that is expected to grow rapidly at a CAGR of 25% till 2015.
  • According to KPMG, the country's fastest growing education sector holds a potential to attract a USD 100 billion investment over the next 5 years driven by demand for skilled professionals and need for infrastructure development.

Initiatives by the Government:

(1) The Indian government is focusing on improvement and expanding the quality of education in the country. To this end, it has made significant budgetary allocation and has framed policies to serve the education sector in India. Government spending on education is set to increase from 7.7% of gross budgetary support in the 10th five year plan to more than 19% in the 11th five year plan. Even in this budget, emphasis had been made on education, where in the budget for Sarva Shikshya Abhiyan has increased and runs into a sizeable amount of 40 - 45000 crores. And with ESL being the largest company in the education space, a large slice of that budgeted amount seems to be enjoyed by it.

(2) Recently significant infrastructure and technological bottlenecks in the education system has led to increasing Public - Private Partnerships (PPP) in this sector in India, similar to those in several other developed education markets outside India. The government has prepared a draft for setting up 2500 schools under PPP model with a contract of 10 yrs between government and the private schools.

(3) Government of India has taken various initiatives to increase the scalability and improve the infrastructure for primary education. It has implemented various programmes like Sarva Shiksha Abhiyan, Mid Day Meal Scheme and National Literacy Mission. To meet the growing demand for access to secondary education, some of the major initiatives taken by the government during the 11th five year plan include the schemes of Rashtriya Madhyamik Shiksha Abhiyan, setting up of 6000 model schools, National Means cum Merit Scholarship scheme, etc.

Opportunities that lie ahead of ESL:

(1) India is projected to have the world's largest population under 20 yrs - 468 million in 2015 which is 40% higher than China's population under 20 yrs at 318 million. Also India is expected to grow at 8.5% - 9.5% over 2011-12 and accelerate to a sustainable 9-10% by 2013-2015 with improvement in demographics being the key growth factor. However favourable demographics need to be converted into a virtuous cycle of acceleration in growth and education is one of the critical inputs to securing this demographic dividend.

(2) Indian Education is characterized by low enrolment rates and inefficient public spend. In the school going bracket, only 212 million of the eligible 360 million are in school. The gap is due to a combination of reasons including children not enrolled in schools, high dropout ratio at different levels and the demand supply gap. The poor quality of education in public institutions is driving the demand towards private education institutes. The number of private K-12 schools grew at double digit growth rates over the last decade. Also, the average enrolments per private schools stood at 288 as against 132 in public schools in 2009-10.

(3) India has a very poor gross enrolment ratio in higher education. Not only is India much below developed nations, it is also below the world average when it comes to sending its students for higher education. It should be noted that the high skill sets that accrue to its citizens as a result of higher education is of paramount importance for the Indian growth story to continue. Failing this, we may not reach our desired goals in developing our economy further. Thus a lot can be done to improve the overall gross enrolment ratio in higher education.

(4) Indian Education Sector is one of the largest education markets (in terms of potential number of students) in the world. The potential education market of India comprises of 464 million people (in the age group of 5-24 yrs in 2006), approximately 42% of the total population. India's $60bn education market is a large and underpenetrated industry with significant upside for future growth. While India spends 4.1% of GDP on education, literacy rates remain low at 62-63% of the adult population, compared to 90-95% in other emerging markets such as China and Brazil.

(5) Households in India spend less than 5% of their disposable income on education compared to 12% in the US, and 15% in China. However, household spending on education has grown rapidly , increasing at a CAGR of 16% in 2002-2008 to USD 15.6 billion. However with structural changes in the Indian economy such as urbanisation and rising disposable income with increasing emphasis on education by parents, the household expenditure on education is expected to grow at a faster pace in FY10-25.

(6) India is migrating towards a service driven economy with the contribution of services and industry sectors to GDP increasing year on year. In such a knowledge based environment, education has emerged as a key determinant of individual success and is driving increasing education spend.

ESL's Presence:

Exploiting all these immense opportunities, ESL is the only education company worldwide that is present across the entire education life-cycle of their customers, the students. They have
  • Pre School Initiative (2-5 yrs): Euro Kids, Little Millennium
  • High School Initiative (5-18 yrs): Educomp SmartClass (digital content solutions), The Millenium School, Takshila School, Universal Academy, Le Mont (high schools) and they even have professional development.
  • Higher & Vocational Initiatives (18-21 yrs): Raffles Millennium International (for higher education) and IndiaCan (for vocational education).
  • Online & Supplemental Initiatives (5-25 yrs): Eduignite (for assessment & counselling), LearningHour & Mathguru (for tutoring service), GATEFORUM, EducompLeap & Vidyamandir classes( for test preperation), EducompOnline WiZiQ (for e-learning platforms) and & learnhub (for admission advisory services).

ESL's School Learning Solutions:

Educomp smartclass: (for private schools): It is first of its kind, teacher led educational content based solution that has dramatically improved learning outcomes in private schools. Powered by India's largest digital content library of curriculum-mapped, multimedia rich, 3D content, smartclass is today a market leader in this domain. The number of Educomp smartclass enabled schools grows at almost 10 schools a day. Recently they have launched new improved version of Educomp smartclass and have raised the barriers to entry for competition even higher. The smartclass class transformation system (or CTS) and the smartclass digital teaching system (or DTS) are the biggest and the most innovative initiatives in the space of digital classroom content and digital classroom hardware respectively.

Edureach (for government schools): Edureach works closely with various state and central government agencies, ministry of IT and HRD, and government of other countries to bring a lasting transformation in education systems. We have a track record of implementing large scale Pubic-Private-Partnership projects. Cumulatively over the years Edureach has worked with over 35000 government schools impacting lives of over 17.5 million students in often hard to reach remote areas of the country. As part of this program, ESL sets up computer labs in government schools, provides multimedia content in regional language, testing and certification in computer education, full time assistants, as well as teacher training, monitoring and supervision. At present, ESL is partnering with 16 state governments covering 11000 government schools and benefiting over 6 million students. These projects give Edureach an opportunity to ignite the desire for learning in those for whom staying in school is in itself a struggle.

ESL's New Developments:
  • In the international market, ESL has signed an exclusive agreement with China Distance Learning, a leading education company in China, to provide their SmartClass content in the Chinese market in the Mandarin language.
  • They have become the largest company in India for CA training by using their breakthrough VSAT model technology.
  • They have also received AICTE license to launch engineering and PGDM programs.

ESL's total equity base stands at Rs. 19.11 crore and has total reserves of about Rs. 2138.76 crores. Comapared to this, its total debt stands at about Rs. 1437.34 crores, which brings its debt equity ratio to about 0.67, which is quite within the safety zone of 2.

ESL's interest outgo (TTM) amounts to a total of Rs. 129.98 cr. Comparing this to its PBIT (TTM) of Rs. 554.42 cr, ESL's interest coverage ratio stands at 4.26 times, which is good enough and shows ESL's ability to pay off its debt.

Its consolidated EPS(TTM) stands at Rs. 23.67. Comparing this to its CMP, the PE comes to about 6.92 in an industry whose average PE stands at about 10.76. Its book Value (BV) stands at Rs. 167.32. Comparing the CMP to its BV, the P/BV ratio comes to about 1.15 times.

Education sector is one of the profitable sector with very high profit margins. ESL's gross profit margin stands at 45.45% and its net profit margin stands at 37.07%. In addition to being profitable, education sector also is immune to recession. It is not heavily affected in times of financial crisis. The cash flow in education is always assured and schools are not dependent on financing their working capital. This makes the education sector as one of the most promising sector.

The big dampener wrt ESL is that it is not a very good dividend payer. Its dividend yield at the CMP stands at almost 0.31%. The only reason for this poor dividend payout, it because most of the profits are reaped back into the company and is utilized to exploit the massive opportunity that lies in front of the entire Indian education sector. This current low dividend payout will definitely be rewarded by massive growth in the future.

ESL's market penetration, even in their biggest businesses is in the low single digits in each of their businesses. There is a long runway of opportunities ahead of them. Even after years of undisputed leadership in the Education sector, their innovation engine continues to churn revolutionary products to solve the key classroom problems and add value to the teaching experience where it is most needed.

Thus here is a company that is a market leader in a sector where a mammoth of opportunities lie ahead and is available at good attractive valuations. Any downside from this point will just make this investment opportunity even more attractive. So take your calls accordingly.

Happy Investing,
Purvi P. Shah

Monday, February 27, 2012

Prakash Industries Limited (PIL) BSE Code: 506022 NSE Code: PRAKASH

CMP (BSE): Rs. 51.50

CMP (NSE): Rs. 51.45

Industry: Power, Steel and PVC Pipes (Diversified)

Prakash Industries Limited (PIL) was started in the year 1980. With focused vision in the core competence areas of mining, steel, power and even PVC pipes, PIL is rapidly carving its niche in the Indian steel industry and has emerged as one of the key producers of value added steel products at competitive prices. In quest to capitalize first mover's advantage in a challenging space with technology intensive products, PIL has always introduced innovative ways to cut costs and maximize resource allocation. For highest value addition, PIL has always emphasized on forward and backward integration.

Level of Integration in PIL:

In the present scenario, the key to success and growth of steel players lie in the level of integration, which is achieved by them in their operations. Power, iron ore and coal are the three key inputs for manufacturing steel. PIL has been making concerted efforts to become self reliant with respect to these inputs. It has achieved significant success by procuring the coal mines to meet its requirements of coal. Captive coal mines at Chotia in the state of Chhattisgarh is already in operation with modern methods of mining, resulting in operational excellence. It has been allotted three coal blocks at Chotia, Madanpur and Fatehpur in the state of Chhattisgarh. It is also operating a captive power plant to meet the power requirements of its steel operations. Further, PIL is also in the process of implementing additional power capacities to take care of its existing gap in the power requirements.

The only concern for PIL continues to be sourcing of iron ore, which is another major input in steel making and constitutes significant portion of the cost. The iron ore prices have continued to spiral which affects the steel margins. In order to mitigate the impact of iron ore, PIL has got itself sanctioned captive iron ore mines in the state of Chhattisgarh and Orissa, however, the inordinate delays in regulatory approvals is a major concern before the mines become operational.

Product Range of PIL:

(1) Coal Mines: With expansion plans in Sponge Iron and Steel making in its integrated steel plant and towards backward integration of the processes for being self reliant in raw materials, PIL has also decided to get into coal mining as one of its operational verticals.

(2) Iron Ore Mines: PIL, as a part of its backward integration policy, has always insisted on being self- reliant to strengthen itself and to ensure uninterrupted supply of quality raw materials to its integrated steel plant at Champa. It has been allotted Iron ore mines in the state of Chattisgarh and Orissa, which will ensure consistent availability of quality iron ore for the integrated steel plant.

(3) Sponge Iron: Being an integrated Steel and Power company, PIL has used the high quality sponge iron produced in the sponge iron kilns for its internal consumption in its own steel plant. This not only enables cost effective manufacturing of steel but also ensures consistent availability of quality raw materials for its finished steel products. has always insisted on being self reliant to strengthen itself and to ensure uninterrupted supply of quality raw materials to its integrated steel plant at Champa.

(4) Power: From its captive power plant, power generation has developed as a full fledged business adding profits vertically to the company. It is presently operating a 100 MW captive power plant using waste heat recovery boilers and fluidized bed boilers and harnesses energy by using waste resources and other innovative and creative ideas. PIL is also on its way to expand its power generating capacities from existing 100 MW to 725 MW.

(5) Steel Melting Shop: It manufactures high quality steel billets/ blooms in steel melting shop. The raw materials used are sponge iron, pig iron and MS scrap, out of which the majority of sponge iron is sourced from the sponge iron kilns of the company. This not only ensures availability of quality sponge iron for steel operations but also results in cost effective operations.

(6) Ferro Alloys: As ferro alloys are the primary raw materials used for manufacturing steel, PIL has also forayed into production off ferro-alloys to ensure supply of quality input to its steel operations.

(7) Wire Rod Mill: Towards forward integration of the processes, PIL has set up Wire Rod manufacturing and Wire Drawing facilities at Raipur for manufacture of high quality wire rods. Since the raw materials i.e steel billets/ blooms is manufactured in the steel melting shop, it is able to produce high quality wire rod and H.B. wire in an efficient and cost effective manner.

(8) TMT Mill: With growing demands of TMT bars due to substantial increase in construction and infrastructure projects in the country, PIL has also set up a TMT mill with most advance technology equipment to manufacture high quality TMT bars to further enhance its product range.

(9) Rigid PVC Pipes: This division was started in the year 1981 to cater and fulfill market demand for irrigation, sewerage and other purpose. With superior quality and aggressive market penetration, it has steadily grown in size over the years. Today it enjoys the status of being one of the largest manufacturer and supplier of PVC pipes in the country. It is the lowest contributor to profit with just 5% share.

(10) Wind Power: PIL has also entered into this zone of non-conventional method of power generation. It has set up wind power generating farms at Muppandal in the state of Tamil Nadu. Because of the favourable wind conditions, the location is very suitable for highly efficient operations.

Expansion Plans:
  • PIL is undergoing massive expansion of 625 MW in the power division. This expansion is taking place in a phased manner. 1st phase of 125 MW is under advance stage of implemetation and is expected to be complete in this quarter. The subsequent phases have been taken for implementation and will be completed in due course of time. This will take care of the long term power needs while the surplus power will be sold to potential customers through open access. Power is the highest contributor to profits with almost 80% share. With more capacity addition, more profits from this division are set to flow in.
  • PIL has new capacity expansion in the sponge iron division as well and is expected to be operational by this month itself. This expansion is meant to achieve high level of integration.

Opportunities that lie ahead of PIL:

  • Although the Indian Steel Industry has stepped up to the 4th position with its total steel production of close to 78 million MT in 2011 and is aiming for the second place by 2015. The per capita steel consumption in the country still continues to be as low as 40 kgs in urban India and 2 kgs in rural India as against the average consumption of close to 350 kgs in the developing countries.
  • Government has framed its policies, to inject funds in various industries such as construction, infrastructure, automobile and power, which will double the steel consumption by 2020.
  • The outlook for the Indian Steel Industry appears to be bright in the coming years due to its strong domestic economy, massive infrastructure needs and expansion of industrial production. In recent times, the Indian Steel Industry has earned a central position in the global steel market with global acquisitions, continuous modernizations, improving energy efficiencies and backward integration into global raw material sources.

  • In midst of such enormous opportunities, the major threat to PIL is the rising input costs. The impediments in the growth potential on account of rising input cost, which may impact the cost structure of the infrastructure projects and other major users of steel.

Risks and Risk mitigation:
  • The cyclical nature of the steel industry is one of the major concerns and the risk to the company. In order to counter it, PIL has made foray into power, where the cashflows and profits are steady. Power sector is one such sector where there are positive growth forecasts owing to the fact that there are huge gaps between demand and supply. Basic most important thing is that there are no potential risks in this sector.
  • Managing uninterrupted supply of raw materials is another major concern and risk against which PIL has made attempts to insulate itself with respect to probable swings in prices of coal and power. However, iron ore still continues to be an area of concern, since iron ore prices have been witnessing highly volatile trend coupled with short supplies. However, it has taken the necessary steps to guard itself against the risk.

Well, PIL is a huge equity capital base company compared to most of my other recommendations. Its equity base stands at Rs. 134.49 cr. Its reserves stand at Rs. 1584.29 cr. Compared to this its its debt stands at Rs. 676.61 cr.Its debt equity ratio stands at 0.43, which is well within the acceptable limit of 2.

Its market capitalization stands at Rs. 692.62 cr. In comparision to this, its sales (TTM) stands at Rs. 1880.12 cr, which is almost 2.71 times more than its current market cap. Its EPS (TTM) stands at Rs. 19.65 and its cash EPS (TTM) comes to about Rs. 24.75. Comparing its EPS to the CMP, its PE comes out to be a mere 2.62 compared to an industry PE of almost 15.91. Even if we take a conservative figure, still a lot of upside is possible here on. Its book value stands at Rs. 116.54. Comparing this to the CMP, the price to book value comes out to be just 0.44 and it points out to a large margin of safety (a little more than 50%), indicating a value buy after checking and confirming its financials.

PIL's interest outgo (TTM) amounts to a total of Rs. 10.42 cr. Comparing this to its PBIT (TTM) of Rs. 349.9 cr, PIL's interest coverage ratio stands at a very comfortable spot of 33.57 times, which again displays the high margin of safety in the stock with respect to its debt position.

One damperner wrt this stock is that it has not paid any dividend to its investors except for the last year.The main reason being it is on its way to growth and expansion and has reaped most of its profits back into the company to take care of its planned expansion plans as well as its much planned backward and forward integration. If you compare its last year dividend (10%) to its CMP, the dividend yield comes to about 1.94%, not very impressive at the moment, but its expansions are quite ambitious and it has very huge potential to reap in good profits in the future, which eventually will lead to an increase in the shareholder's value in the future.

The promoters hold about 46.49% of the total equity shares. About 8.02% is held by FII's and the remaining is with the public.

As per the latest quarter results, power generation has been higher by more than 38% during the quarter as a result of new capacity additions. The 1st phase of the expansion programme taken up by PIL in power generation capacity is now almost complete and is expected to be fully operational in the current quarter. The performance of steel division, wire rod division, and ferro alloys division has also been satisfactory with improvement in prices. Capacity additions in sponge iron is also nearing completion and expected to commence operations from this month itself.

So here is a company, that is highly diversified, into those industries that cater to the infrastructural needs of the country, ample growth prospects, well within a high safety net, huge reserve, highly comfortable in servicing its debt, on a path of massive expansion whose profits are yet to be roped in, highly ambitious and as per my view highly safe stock. Once its expansions are complete, profits flow will be immense and the stock will realize its true value. Patience will be rewarded because sooner or later value always gets realized.

The stock had very recently been battered to almost Rs. 25 per share and had even reached a recent high of Rs. 63.30. Currently it is traded at Rs. 51.5. Even at this price, it seems very attractive. If it goes down beyond this point, it is just going to get more attractive. So take your calls accordingly.

Happy Value Investing,
Purvi P. Shah

Saturday, February 11, 2012

Just a word of caution.

Greek's fine capability to simply splurge money endangering Eurozone in quick sand, US's snail speeded economic recovery, China's secretive game plan, national political war, Iran's stubborn play leading the crude prices to space, ballooning fiscal deficit, enormous expectations from the budget. In short enormous UNCERTAINITY. Worst is not yet over.

Since the PIIGS issue became an intergral part of our global survival, I have pondered over the thought that, how big an economic catastrophic event can a small sovereign nation like Greece subject the world to. The answer always seemed foggy, since the Eurozone issue has transformed into something like a three dimensional chess. Seems very complex and mindblowingly complicated.

Another question that pops up in my mind is that when a common man who is in deep debt
(his entire monthly income also falls short to pay up his monthly interest payments), asks for more debt, how many banks are willing to provide him with more capital, with more debt? The answer would be none. Why? Because the banks have their risk management policies in place and they adhere to it while giving out loans. Do they follow the same policies while lending out to a sovereign nation? The answer is a painful no. Painful not just for the banks but for many throughout the globe. Why? Because the simple lending and relending fuels a small wave to become a massive tsunami which is quite disasterous to everyone around.

Now lets get back to how a small nation like Greece's debt issue is proving time and again to be so economically sensitive. The problem is that no one knows what will be the possible repurcussions on Greece and the domino effect on the other Eurozone nations as well as the global economy in case of default or for that matter even a bailout.

If it is bailed out by agreeing to the terms and conditions of trioka, Greece's debt to GDP ratio will come down from 160% to 120% by 2020. Still, is 120% of debt to GDP ratio sustainable? With severe austerity measures, will it be able to honor its future debt repayments? Its a big question mark, because chains of habit are too hard to be broken. The same habits that has got Greece to such a harsh fate. In order to bail out Greece, the private creditors have agreed to a 70% haircut for the Greek bonds. Can ECB do away with a 70% haircut? The answer is again a no because if will prompt other debtor nations to ask for a bailout too. And there are indeed other Eurozone nations standing in line for a possible bailout. Its quite messy and extremely frustrating.

Next comes US. Just a thought, how many of us actually remember US's debt woes amidst Eurozone's debt woes. I would say very few. Can ignorance at this level be a bliss? I say, ignorance in this case can be brutally fatal. US's debt has reached a level of 15.3 trillion, a level equal to its GDP and the economic recovery is frustratingly slow and the debt is expected to grow at a much faster rate than the GDP. The 2008 crisis led by Lehman was of mere $600 billion dollars and its repurcussions pushed US in such huge debt. Imagine a multifold severe crisis in US, even before people have come out of the 2008 crisis. My mind gives up because the severity will be exponentially dangerous.

Looking at China, I absolutely have no views, because of its secretive nature. The great wall of China was indeed built with a clear intention, not let the outsider know what is going on inside. I being an investor, would never put a single money in such a country, but unfortunately all don't think the same. Some of the greatest investors have their huge bets on China. But I believe in one thing, something that goes up rapidly have to face the strong forces of gravity. Now will it be a hard landing or a soft one for China, time will tell.

Coming back to us, India, like any globalized economy, is not immune to the global woes. In addition to it, there are many internal back drags. To begin with, we have an embarrassing political war going on, which puts India in a very bad shape in front of the world. This is a total dampener especially when we operate in a global economy and have to put our best foot forward to derive the maximum utility off this global reach. Our fiscal deficit for the first 9 months of the current financial year have already far exceeded the budgeted 4.6%, owing to the skyrocketing crude prices (owing to Libya unrest and now Iran's stubborn act), fuel subsidy, fertilizer subsidy and many more dampeners. The expectations from the forthcoming budget are at a peak, fulfilling all those peaked out expectations will indeed be a very difficult task.

In midst of all the gloom, I still bet high on India. But be cautious, place your bets carefully. Srategize by keeping the worst case scenario in your mind. Because, we unlike China are not dependent on exports, we have a huge internal demand to cater to. We need to harness that strength to derive the maximum growth. We can write our own fate and not let our fate be in someone else's hands. Play safe. Play well.

Happy Investing,
Purvi P. Shah

Monday, January 9, 2012

Balaji Amines Limited BSE Code: 530999 NSE Code: BALAMINES

CMP (BSE): Rs. 34

CMP (NSE): Rs. 34

Industry: Commodity Chemicals

Balaji Amines Limited (BAL) was established in 1988. It is an ISO 9001:2008 certified company, specialized in manufacturing Methylamines, Ethylamines, Derivatives of Speciality Chemicals and Natural Products whose products are accepted in the international markets and have gained the distinct export quality status. These are the main products, but they also manufacture derivatives, which are the downstream products for various Pharma/Pesticide industries apart from user specific requirements. It is one of the leading manufacturer of Aliphatic Amines in India. Since 1988, BAL has been consistently adding capacities and fine tuning its processes to provide quality products at lowest cost to the customer.

BAL has three full-fledged manufacturing facilities - two in Maharastra and one in Andhra Pradesh. BAL`s state-of-the-art manufacturing facility is located at Tamalwadi Village, near Solapur (Maharashtra State, India) The facility is fully equipped with latest technology. In addition to this, BAL possesses an excellent R&D facilities and laboratory, which helps in conducting basic research and also to fine tune the process.

It is the first Indian company that has set up dedicated plants for the manufacture of specialty chemicals like N-Methyl 2 Pyrrolidone (NMP), Morpholine, 2 Pyrrolidone (2-P), Gamma Butyrolactone (GBL), Poly Vinyl Pyrrolidone (PVPK 30), N-Ethyl-2-Pyrrolidone (NEP), MMAE, DEAE, DMU and DMAE, which are widely accepted by clients the world over.

BAL's growth story:

Over the last decade, India has emerged as one of the world leaders in the discovery, development and manufacture of pharmaceuticals, chemicals and specialty products. BAL is among the frontrunners in this impressive growth story, providing high-quality inputs to a host of well-known global brands. Through a series of sustained and systematic process refinements in its indigenous facilities, BAL has been consistently adding capacities to meet the ever-growing demand for its world-class products, from both the domestic and overseas markets.

BAL has come a long way since its inception in 1988, from being a single product company to one whose products find their application in diverse industrial segments such as:
  • Active Pharmaceutical Ingredients (APL)
  • Agro- chemicals and pesticide formulations
  • Refineries
  • Water treatment chemicals
  • Rubber chemicals
  • Electronics
  • Photographic chemicals
  • Dye stuff and paints
Its clientele is quite impressive. It includes some big names like Reliance, Ranbaxy, Piramal Healthcare, Sanofi Aventis, Stan Chem, Syntex, Sun Pharmaceuticals, Thermax, Venkys, Wockhardt, Aurobindo, Bharat Petroleum, Aceto Group,Clariant, SF Chem, DSM Group, Whyte Chemicals, BASF, Cipla, Bayer Cropscience, Dr. Reddys, Godrej, Hindustan Petroleum, Indian Oil, GAIL, Kores, Lupin, and many more.

BAL's upper edge:
  • BAL is India's largest manufacturer of methylamines and their derivatives, with a market share of over 60%.
  • It is the world's largest producer of Di- Methyl Amine Hydrochloride (DMA-HCl), commanding nearly 90% of the global market share.
  • BAL is the only producer of NMP.
  • Through judicious and far-sighted backward/ forward integration, BAL consumes over 70%of its methyl amines production capacity internally, which significantly enhances its margins and value chain.
  • BAL also has a dedicated state-of-the-art R&D facilities that are constantly striving to increase efficiency in its processes, further improving the quality of its products by improving operational parameters, achieve backward and forward integration of its products and develop new amines and derivatives as downstream products in pharmaceutical, pesticide and other industries.
  • Due to its inhouse R&D and captive power generation , BAL is one of the lowest cost producer of Methylamines in the world.

BAL's Diversification Plans:

A 100 room hotel property is being developed at Solapur. It is supposed to be operational by mid 2012. BAL has entered into a formal agreement with the Sarovar Group of Hotels has been entered into for operating and managing the hotel property in the name of 'Balaji Sarovar Portico'.

BAL's Expansion plans:
  • In Feb 2011, BAL commissioned a new plant for manufacture of GBL/ NMP/ 2P with an installed capacity of 50 MT/day. This capacity expansion is expected to add both to the topline and the exports in the coming financial years.
  • A new plant for the manufacture of Methylamines is under implementation with an installed capacity of 30000 MT per annum at MIDC, Chincholi, which will be commissioned in the current financial year.
  • BAL has even planned to invest Rs. 70 crores in its Solapur unit expansion. It has been planning to implement a hotel project worth Rs. 40 crore in Solapur currently. It is planning to expand the current capacity of Methyl Amines from the existing 22,000 TPA to 55,000 TPA. This required fund will be raised partly by debt and partly through internal accruals.
  • The production of Methyl Amines is scheduled to be steamlined by January 2012. Another product Di- Methyl Amine Hydrochloride would come into production by April 2012. The third product Dimethyl Formamide will come into stream by July, 2012.

BAL has a very small equity of just 6.48 crores. This is quite attractive because small base has its own advantage. Even if there is a small rise in the profits, there is an exponential rise in its price mainly because the profits are distributed among a smaller base.

Its market capitalization at the CMP stands at Rs. 108.22 crore. Compared to this its sales stand at Rs. 405.65 crore (TTM), which is 3.74 times its market cap, which puts BAL in a very attractive zone. However, its debt (Rs. 165.47 crore) level may be a dampner for many. However due to its good earnings, its capability to service the debt is very much in the comfortable zone, with its interest coverage being 4.14. So the debt concerns can be done away with.

Its EPS stands at Rs. 8.70 (TTM) which brings the PE to just 4.23. Compared to this, the industry PE stands at 17.65, thus BAL looks to be very attractive at the current valuations. It has been constantly paying dividends since the last 9 years.

Its topline has shown continuous growth and has grown at a CAGR of 18.2% over the past 5 years. Moreover, its bottomline has shown an impressive CAGR of 26.75% over the past 5 years. This kind of growth is quite impressive. Looking at the current developments in BAL, this kind of growth is set to grow further.

The promoter and promoter group holding is about 53.97% of the total share capital as per the September quater. The promoters however have pledged about 38.5% of their total holding (38.5% of 53.97%) in favor of banks to secure various credit facilities for the smooth progress of their expansion/diversification plans. This might be the biggest dampener for most of the investors. But in my view, a company that has been showing constant growth over the years and is expanding the way BAL is, is capable enough of servicing its debt, isn't a bad deal.

BAL is a good bet amidst all the uncertainites mainly because of its superior product range catering to a very well diversified range of industries from pharmaceuticals to agrochemicals to FMCG. Almost all pharmaceutical companies, be it Indian or international, all are the customers of BAL. Definitely a good deal.

Happy Investing,
Purvi P. Shah

Friday, June 17, 2011

Value Buy......Screaming at the Loudest....

Oriental Carbon & Chemical Ltd. (OCCL) and Sree Rayalaseema Hi-Strength Hypo Ltd. (SRHHL)

I had mentioned these two stocks last October. From the October levels, they have fallen down. A lot in case of SRHHL. OCCL even fell down to 100 levels but has managed to recover till 133, the CMP. OCCL and SRHHL was broken down on very small volumes. However the optimistic views that I shared wrt them, still stands strong. Infact, I think they have become more attractive in terms of valuation and has a massive amount of value to be realized. In my view, over long term, value always gets realized. So here are two stocks screaming out loud - VALUE BUY.

OCCL is a manufacturer of insoluble sulphur which is used in tyres. I am very optimistic about the auto sector in the long term, thus the demand for insoluble sulphur is set to increase. OCCL is in a kind of monopolistic position, thus putting it in a very sweet spot and making it a great attractive target for merger or aquisition. Value is always realized when there is a potential buyer, and with its monopolistic position in the market, its value can possibly be realized.

OCCL is available at almost its book value and has posted an earing of Rs. 36.30 for the year ending March 2011 as against Rs. 28.61, showing a growth of 26.7% y-o-y. This is incredible. Its PE at the CMP stands at just 3.24. It is a good dividend paying company with dividend yield of 3%. A good thing about it is that it has a very small equity of just Rs.10.31 cr. Thus even a small rise in its earning can reflect in a much higher rise in its market price. A potential MULTIBAGGER.

SRHHL is the only Indian manufacturer of Calcium Hypochlorite. Although being blessed with adequate rainfall, alot of it is wasted and there is less and less of CLEAN and SAFE water available per person. Due to this, water treatment industry has changed considerably during the last 50 years and is growing with each passing year. Thus a lot og growth potential lies ahead for companies involves in manufacturing of water treatment chemicals, just like SRHHL. SRHHL is one such company that is dedicated to research and development of products in water treatment and purification.

SRHHL is internationally recognized as the provider of unmatched quality products through its world-class sodium process technology developed through highly skilled in-house research and development team. It has grown to become a global leader in exports too.

SRHHL is available at such high discount, almost at 0.63 times its book value at the CMP. Its EPS for the year ended 2011 stood at Rs.18.97 against Rs. 3.28 in the previous year, showing a growth of 4.78 times. At the CMP and the FY11 earnings, its PE stands at just 2.25. It paid a dividend of Rs.1.5 per share resulting in a dividend yield of 3.5% at the CMP. Like OCCL, even SRHHL has a very small equity base of Rs.10.45 cr. It looks very attractive at the current valuations.

Happy Value Investing.

Monday, May 23, 2011

Karuturi Global Limited (KGL) BSE Code: 531687 NSE Id: KGL

Risky bet

CMP (BSE): Rs. 12.44

CMP (NSE): Rs. 12.40

Industry - Agricultural Products

More food will have to be produced worldwide over the next 50 years than has been during the past 10000 years combined.

In an interview, Warren Buffet said that he would rather have all the farmland in the US than all the gold the world has ever produced. This is simple logic- when hunger strikes, we crave for food and not gold.

More than crude, the more enduring challenge would be how to feed the world population which is set to rise from 7 billion to 9 billion by 2050. This will require a 70% increase in food production. Not that the world does not produce enough food for 7 billion people, it does. But the problem arises due to the poor infrastructure due to which about 30-35% of fruits and vegetables are destroyed in transit. Thus with such massive challenge in front of us, it is the time to concentrate on AGRICULTURE. Karuturi Global is one such Indian company that has identified agribusiness as its prime growth domain.

Karuturi Global was incorporated in 1994 and today it is a world leader in production of cut roses with operations spread across Ethiopia, Kenya and India. With an area of over 239 hectares under Greenhouse cultivation, they annually produce around 555 million stems of quality cut roses, essentially for exports to high-value markets such as Europe, Middle East, Far East, Australia, New Zealand and the US.

After identifying agribusiness as the next prime growth domain, they have taken up cultivation in Ethiopia on a mega scale to become a key player in the global agro-products market. They have acquired around 7.65 lakh acres of land in Ethiopia and they aspire to become a complete agriculture production company. Their goal is to make a significant contribution to alleviate the global and african food crisis. Their other business interests include food processing, floriculture retailing and information technology.

Global Scenario:

The demand- supply situation is tightening and this could put the world in a very delicate situation since demand is soon expected to outstrip the supply. It is not that the world does not produce enough food for 7 billion people. It definitely does. However there is a lot of wastage due to poor infrastructure and inadequate facilities.

So now Karuturi Global's goal is to alleviate the global food crisis, and the aim is to become a complete agriculture production company with global presence. Thus in the 1st phase, they are cultivating cereals (maize and rice) on the 70000 hectares of land and oil palm on the 20000 hectares land of the total 311000 hectares of land that they have acquired on a lease basis in Ethiopia.

Maize is considered to be the third most important cereal grain in the world after wheat and rice. In developed countries, maize is consumed mainly as second-cycle produce, in the form of meat, eggs and dairy products. In developing countries, maize is consumed directly and serves as staple diet for some 200 million people. Most people regard maize as a breakfast cereal. However, in a processed form it is also found as fuel (ethanol) and starch. Global demand for maize to increase by 45% - Global cereal demand in 2020 is estimated at 2.1 billion MT and will show a major shift in the favor of maize with demand estimated at 852 million. This reflects a substantial growth of 72% for maize in developing countries.

Business Segments:

(1) Floriculture:

Floriculture has witnessed significant growth in the past few decades, and has today matured into a dynamic, global and fast-developing industry. While the developed world viz., the EU, the U.S. and Japan, continues to account for two-thirds of the world market for cut flowers, developing countries situated along the equatorial line have now emerged as major producers and exporters. The main drivers for this paradigm shift are favourable climatic conditions for cultivation, and lower production and labour costs.The floriculture industry has been blooming at a healthy 11-13% over the past few years and is expected to maintain its growth momentum. And, Karuturi Global, the world’s largest, multi-location producer and exporter of quality cut roses, aims to spearhead this growth and consolidate its position in the global market. They have identified two African nations0 Ethiopia and Kenya for developing their production base. Their distribution network includes auctions (for about 55%) and the remaining 45% is distributed directly to wholesalers and retailers.

They even have their own retail initiative in India called 'Flower Xpress', which aims at revolutionise marketing of flowers directly to the end-users. Under this initiative they have a total of 22 shop in shops and stand alone outlets located at highly accessible and strategic locations in Bangalore, Chennai, Hyderabad, Delhi and Mumbai. Along with this it has also picked up 54% stake in Mumbai based Florista. Florista has chains of floral designing boutique stores spread across India. It speacializes in designing exquisite flower arrangement and decorations made from exotic flowers imported from across the world. It currently has 15 retail boutique stores in India and has a strong network. Karuturi is planning to merge its retail operations carried under the brand name 'Flower Xpress' with Florista. This will result in consolidation of KGL's retail presence. The main aim is to tap the potential of the modern retail, improving visibility and branding and to become the largest retailer in the floriculture space in India, Thus with this aim, KGL intends to aggressively grow the retail network in India to over 100 stores in 2 years.

(2) Agriculture:

After setting a firm footing in floriculture, Karuturi Global commenced its onward journey. The goal now is to alleviate the global food crisis, and the aim, to become a complete agriculture production company with global presence. They identified Ethiopia as a land of opportunities, especially for agro-based businesses. A stable political and macroeconomic system, suitable climatic conditions, abundant availability of low cost, favourble investment climate, disciplined and productive work force, and above all, easy access to the African market are some of the key factors favouring Ethiopia.

They acquired 311,000 hectares of land on lease hold basis from Ethiopian Government in Baka and Gambela region in Ethiopia. They intend to cultivate short, medium and long gestation crops. In the first phase they intend to cultivate cereal crops (rice and maize) on 70,000 hectares and oil palm on 20,000 hectares.

(3) Food Processing:

They have set up a food processing plant with an installed capacity of 6,000 tonnes per annum at Tumkur, located about 85 kms from Bangalore. At this facility, they have taken up bulk processing and bottling of gherkins (baby cucumbers), essentially for exports to Europe and the U.S. Depending on the type of pickles prepared in sweet or sour tastes, they are bottled and preserved in acetic acid, vinegar or brine medium. Encouraged by the promising response to the food processing business, they have initiated steps to take up bottling and exports of other vegetables such as raddish, beetroot, carrot, baby corn, jalapenos and green ball peppers. The produce for their food processing plant is currently procured from farmers under a contract farming model. To supplement this, they intend to acquire around 200 acres (approximately 81 hectares) of land near Mysore for cultivation of gherkins and other vegetables.

(4) IT Business:

Their highly-profitable IT business division is growing at rapid pace. They have obtained a Category-A licence for Karnataka state and have been a prominent internet services provider (ISP) to large MNCs and medium-sized companies, and their R&D centres in and around Bangalore. Given the thrust for broadband penetration in India, they have entered the consumer broadband business. They have tied up with cable operators in five cities of Karnataka to provide last mile access.

Their business has been showing remarkable progress, growing at 30-50% over the past few years. To expedite their expansion, they are adopting the inorganic route. They have taken over Estel Communications, an ISP with pan-India presence, robust network and excellent client-base. They are also toying with the idea of acquiring other B-category ISPs in South India. In the times to come, Karuturi Global aims to develop the plug and play broadband service products, which will substantially augment revenue flow.

KGL has an equity of Rs. 56.08 cr and reserves of approx Rs. 719.69 cr. It has a total debt of around Rs. 439.72 cr. Its debt equity ratio comes to about 0.6. Its book value stands at Rs.13.83 which means the stock is currently available at a discount at just 0.9 times the book value. On a consolidated basis, it earned a total of Rs. 3.03 per share which is currently available at around Rs. 12.5. Thus the PE for KGL stands at just 4, which therefore makes KGL very attractive for investments at current levels.

KGL's 52 week high and low are Rs.38.70 and Rs. 10.49 respectively. Its touched its 52 week high on 21st Oct last year. However now it has come down loosing almost 70% in span of just few months. The reason behind this is supposedly thought to be SPECULATION. However, people with long term view in their mind can have a look at KGL. Although it seems risky, owing to the speculation, the business prospect seems much more promising to me. So someone who is ready to take on the risk can look at KGL. Depending on ones risk tolerance, investment in KGL should be viewed.

Happy Investing,

Purvi P. Shah