March 9, 2007

A rejected idea – tube investments

Tube investments is an idea which passed through my initial filter. I initiated the next step of analysing the company’s annual report. The analysis summary is below


The company has several businesses such as cycles, precision steel tubes and other tube products, chains, metal forming and financial services.
The company has had good return on capital of 20%+. It has a net margin of 5-6% . Its debt equity ratio has been between 0.4 to 0.6. The company has shown low growth with the topline increasing by 50% in the last 5 years. The net profit has tripled in that period (net of one time gain on investments)
The company has a net investment on the balance sheet of 500 Cr (net of debt). If I knock off the investment value of 28 Rs per share, then the valuation comes to around 5 PE based on the current market price. The stock seems to be a compelling buy.

Reason for rejection

On analysing the consolidated balance sheet, I discovered that the company has an additional debt of 500 Crs on its books due to a JV. The company has converted Cholamandalam investment and finance co. (CIFCL) into a JV with DBS bank. As a result the JV debts is now on the books. The company has however not provided any details further on this event. I think the event is important enough for the company to provide more details and give an assesment on the risks.

The above reason may seem small, but the debt and corresponding risk changes the profile of the company. The D/E ratio is now 1.3:1 and the company has not even provided enough details of the new JV. As a result I have decided to give the company a pass for the time being.

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