March 24, 2006

An investment idea (In process)

I generally run a simple screen in icici direct to list all the companies selling below a PE of 12. Why a below 12? Well, there is a certain logic behind it and I will expand on it in another post.

So with the market at 10,000+ levels, the list has become fairly short with quite a few banks and commodity companies. I analysed a two companies (one looks interesting, the other one does not) and here are my thoughts on the first one (micro inks) which looks promising enough for further analysis.


Micro inks

As the name suggests, this is a 900+ cr company with the main business in inks. It is a kind of an Indian multinational with around 57% turnover coming from overseas (US accounting for almost 34%) and is fairly vertically integrated.

The company has done well in the last 5 years with CAGR growth of 20% in revenue and average net margins of 8-10%. See P&L
here

The company has a fairly conservative
balance sheet with a low Debt to equity of 0.3. The ROE has been erratic but at a respectable 10% plus for a few years. Other Financial ratios look like Net margins, Operating margins have increased and are at healthy 10%+ and around 15-18 % for OPM. Account recievables are almost at 100 days, which is not healthy and a figure which needs to be watched closely. It is mainly at this level due to the type of marketing setup the company has (distributors, resellers etc)

The company has expanded its international operations through equity funding and moderate amounts of debt. This has a lower risk (for the company atleast) although the ROE is depressed now. Most of the investments seem to be in Subsidiaries and JV’s.

The company is valued at around 11 times last year PE. This year however has not been as good with profits declining due to raw material cost pressures. However the company still sells below 12-13 forward PE (Full year results are not yet in).

The numbers look fine (I need to read the annual report), but there some issues which I need to think through further

- How will the international strategy play out for microinks. Will the company be able to expand profitably in the international markets?
- What is the capital structure plan for the company. Will future expansion happen through equity (more dilution?)/ Debt or internal accruals?
- Competitior analysis

I have still not made up my mind on the above company, and will add to my analysis further as I read up on the company.I have done the basic checks on the company and nothing seems to be wrong on the face of it. In my case, it means that i will now be investing more time in understanding the industry dynamics, competitor analysis and try to understand the future economics of the company (mostly the soft stuff).


So typically i go through the annual report and the numbers as the first step and try to see if there is something off in terms of the numbers like high debt, excessive valuations or any other issues. If the investment idea passes the basic checks, i get into more detailed analysis which takes a few weeks for me.

6 comments:

Shankar said...

Hi Rohit,

Need you to check out a few things here -
a) What is this 365.59 crores of investments lying in the balance sheet of the company?
b) Why has the company come down from the 750 levels to 450 ...?
c) Why are the directors of the company resigning (Mr. Prashant Desai and Mr. Vinay Pandya) or selling shares (K. K. Unni)
d) Public shareholding in the company is only 13.34%. Is it going to have an impact with buybacks, lower dividend etc. (I wrote this before going thru the news ... there has been a considerable hike in stake by the parent company to 70.5% recently)

Now, lets discuss and study the impact of this on the balance sheet and the stock price.

Warm Rgds,
Shankar

Rohit said...

i am not able to get the company's AR and that is putting me off as i cannot proceed with next level of analysis

however my take (cannot confirm as of yet) on your points above

a) the 366 odd crores investment in the balance sheet looks like investment in subsidiaries, JV etc. But i am not sure as i have not been able to look at balance. would find it surprising if the company is investing in securities and at the same time raising equity capital

b)no idea why the price is dropping

c)how did you get this detail. i am not sure why, but it is definitely worth investigating

d)this is worrying.low public holding can become a problem later. also the company is raising capital and at the same time the promoters are buying back. per-se promoter increasing holding is not an issue, especially if they any way have a majoriity stake. They may be thinking that the stock is undervalued or worse may have plans to take the company private. But all this is conjecture on my part and worth investigating

ValueArchitects said...

Shankar, u can figure out the ans to ur questions very easily by urself.

Rohit,
1) Leave ur ID - i will mail u the ARs.
2) The inks biz is global commodity - chk out Dianippon which has stakes in coates (DIC co), sudarshan (dic has stakes in it). Site (http://www.dic.co.jp/eng/company/global/asia.html) shows that the biz is local to a country. With German co acquiring stakes in Micro, i doubt the growth prospects of Micro - as it may end up only as an indian sub.

3) I think most imp point to moot is "whether a there is a chance of reverse book buildin by German co". The german partner may want to acquire the entire indian co and delist it..... This doubt comes from the fact that people like ChrysCapital had bot the stakes into Micro at Rs 650 (open offer price). Now either Mr Dhawan is a bloody-fool or too smart to know something which we dont!!!

Rohit said...

my email id is rohitc99@indiatimes.com

ValueArchitects said...

Its bouncing off ur mail ID - if u got some other ID, let me know..
- valuearchitects@gmail.com

Rohit said...

can you email to rohitc99@gmail.com

thanks
rohit