June 26, 2007

Searching for investment candidates - IV

A few more investment ideas which have passed through the initial filters.

Alembic – A mid cap pharma company. Revenues have gone up from 550 Crs to around 750-800 Crs for the current year. Net profits in the same period has gone up from 30 odd crs to 80-82 Crs. The margins have doubled in the same period, however the ROE continues to around 20% due deterioration in inventory and fixed asset turns. The valuation at around 7-8 times PE looks interesting. Definitely worth further investigation.

Infomedia – The company is valued at around 20 times normalized earnings. The bottomline has been more or less stagnant. The reason for looking at the stock was it has appeared in rakesh jhunjhunwala’s portfolio recently. However I cannot see the value in it (and also I am not as smart as the big man to be able to see the value, so need to study the company more)

Gruh finance – A subsidiary of HDFC and selling at almost 6-7 times the latest quarter earnings. Seems to be a well managed company and worth a closer look. Diffcult to conclude from looking at the numbers alone in case of an HFC. However the company is defintely worth a closer look.

update : 06/26
Had a look at gruh finance again. It is selling at around 20 times annual earnings and 3 times book value. At this price the stock may not be over-valued, but does not look like a bargain too. A good company to track and wait for the valuations to come down a bit

Manugraph and VST – I will be posting detailed analysis for these companies in later posts.


RaviAranke said...


Thanks for posting your ideas. It really helps to discuss in real time.

I will confine my comments to Infomedia. Will write another comment later on Alembic.

Mr. Rakesh Z., from what little I have read about him and looking at his PF, seems to be an investor who looks for Peter Lynch style 10 baggers. Such an investor is not too worried about price hitting bubbly levels if he is confident about long term growth prospects. Mr. Rakesh's holdings in Titan and Praj, both of which I think are way overvalued, speak to this.

If this premise is correct, then Infomedia makes perfect sense for him. He is essentially betting on the long term growth of the sector.

Infomedia is a business which is undergoing significant transformation - from a stagnant old publishing/printing house to a turbocharged publishing BPO. Publishing BPO growth for Infomedia is on a tear - 36 Cr of revenue in last FY to 51 Cr of revenue this FY, according to investor presentation on the site. It now makes up 26% of business. The EBITDA margins are much better in the BPO business at around 30%+.

If you look at Q-o-Q statements, available on the site, and compare consolidated vs. standalone , the story begins to be revealed.

Most of the profits are being driven out of the consolidated business - which is presumably new BPO business that houses the acquisitions that infomedia made in last year: Cepha Image (Bangalore), Keyword (UK) and joint venture with Reed (US).

From my quick calculations (subtracting the standalone from consolidated) I get following figures for the new businesses.

Revenue(PAT in brackets)
March 07: 16 Cr (5 Cr)
Dec 06: 12 Cr (2.75 Cr)
Sep 06: 12 Cr (1.3 Cr)
June 06: 11 Cr (2.6 Cr)

In fact, but for the new businesses, the old standalone business has shown losses in 2 of last 4 quarters.

So, essentially, you are taking a bet that old business will be turned around/unprofitable portions closed/spun off and the new business drives the growth going forward.

Valuations: The old business could probably be valued at 150 Cr (10 Cr of earnings power x 15 multiple). So, you are getting the new business at about 300 Cr.

If you assume that new business is generating 20 Cr in PAT (forward earnings: 5Cr in lastest Q * 4), the new business is available for forward PE of 15. This is a reasonable valuation compared to BPO segment where valuations run in 30x if not 40x forward earnings. If the BPO business indeed continues to grow at 50% rates that it showed last year, today's price is quite cheap.

Some other factors:
+ It was Tata Press few years back. This is good pedigree.

+ They proposed a share buyback in 2006 worth 14% of outstanding equity. The buyback price mentioned in Annual report is 245. Assuming that they are doing buyback at sensible price, one is getting the shares today at the same price is buyback price. This is a plus.
Share buyback also shows that they are shareholder friendly.

- Growth of Publishing BPO and the usual risks that apply to all BPO such as appreciating rupee, declining billing rates etc.

I do not know much about publishing BPO space. But if I were to choose between McMillan India and infomedia, I think a non-captive independent unit like Infomedia is a much, much better bet.


sajanvm said...

Agree with your analysis. I have been invested in Infomedia for more than a year now. Am watching their transition with glee.
One additional point is that ICICI Ventures owns 34% . They are a VC fund and they will sell out. 3 times sales would not be something outlandish for a publishing media/BPO target.

Rohit Chauhan said...

great analysis ravi ....unfortunately the entire premise for investing in infomedia depends on how well one can analyse a BPO and specifically that of infomedia.
i however do not have any special insights. i had invested in macmillian and felt it was undervalued and somehow they have never been able to turnaround their performance. the problem is i am not able to figure out why. so my personal conclusion is i do not have any special insight in the BPO business and hence have given infomedia a pass. but it is worth following the company and the stock and see how it plays out