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.