February 22, 2006

My thoughts on sundaram clayton

I came across this post on sundaram clayton which got me interested in the checking on the company. On reading the annual report, this is what is found

  • sundaram clayton is in the business of auto-components – namely brakes and into aluminium castings
  • The company has a revenue of 5360 million rupees, NP of 534 million rupees
  • An average of ROCE of 20%+ with average Debt/equity ratio below 50 % (except current year where ratio is close to 50%)
  • Healthy NPM of 8-10% consistently across the years
  • Sundaram clayton is also know for its six sigma initiatives and has received several prefered supplier awards over the year

The company has several subsidiaries with a few associate companies too. The rough back of envelope calculation is as follows

The biggest holding is TVS motor company at 57%. A rough valuation is 16000 million (current year NP*12). The value of the holding is conservatively at 9120 million.
All the other subsidiaries are small with combined net profit of roughy 130 million. I would value is not more than 2000 million with Sundaram clayton value not exceeding 1500 million ( a very rough valuation).

So the total value of all the holding seems to be around 10620 million. With around 1090 million as debt and 25 million as cash , I would put the net value of these investment as 9600 million. The stock sells at 885 per share and with 18.9 million outstanding shares, the equity value is 16726 million. Back off the value of this investments and the company is valued at around 7100 million.

So with current EPS of 28, the PE comes to around 12-13.

Now all the above calculations are very rough. But it seems to be that the company is undervalued.
Although my initial analysis has not turned up anything negative, I would still not commit money to the stock as I still have figure out the following

  • The catalyst which could unlock the above value.
  • A more detailed analysis of the industry dynamics as there seems to be new competition coming up in the same segment as the company (there is mention of this in the management discussion)


ValueArchitects said...

You cannot take the value of investments on face, as it may never get unlocked. Holding discounts are 25%-30% types. Chk out jindal strips..but do keep me posting on ur opinion/analysis. valuearchitects@gmail.com

abhinav said...

if u can give some investement ideas.......

Shankar said...

Rohit, a very valid concern.

News often unlocks value. There was an instance in 2001 when the value of Sundaram Clayton was unlocked. The under-riding news was on the split of TVS Motors and Suzuki.

It was a rather interesting case because Suzuki gave away it's share in the Joint venture at 16 rupees, while the market price of the stock was 90 rupees. This was a catalyst to the value unlocking.

Always remember, Value investors are patient people. They buy before anyone else buys and sell before others have woken up to buying.

Warm Regards