November 28, 2007

Some interesting ideas

I have been looking at the following two companies for the past few weeks. I have yet to make up my mind on them. I generally prefer to buy at 50% of conservatively calculated intrinsic value of the company. Both the companies trade at a discount to instrinsic value, but above the 50% mark.

The companies are

Grindwell norton
SRF


My personal notes on each company

Grindwell norton

Grindwell norton is in the business of abrasives and refractories. The industry is dominated by two player – Carborundum and grindwell norton. Grindwell has been doing fairly well for the past few years. It has an average ROC of 15%+ for the past few years. It has been able to maintain a NPM of 10%+. The average sales growth has been over 15% on an average and the NP growth in excess of 20%. The asset ratios have improved, especially the Wcap ratio and the profit margins have improved from 7-8% to 10-11%. The company enjoys reasonable competitive advantage due to R&D support by parent, strong sales force, decent brand and a wide customer base. There are reasonable entry barriers in the industry too.

Grindwell has recently sold a stake and netted almost 100 Crs from the sale. The Company is debt free and has almost 100-150 Cr in cash and investments. The company is however trading at 20-30% discount to intrinsic value which is above my target price


SRF

SRF has the following business segments – Technical textile divison which is
includes tyre re-inforcements, belting fabrics etc. This division makes up almost 50% of the revenue, but contributes to less than 10% of total profits with Pre-tax margins of around 10%. This business segment is facing a lot of competition and has seen margins drop for the last few years. The chemical business makes up 40% of the revenue and almost 90% of the profit. This division is highly profitable with pretax margins in excess of 50%. The profitability of this division has gone up in the last few years. The rest of the revenue is from packaging films business. This business made a loss in 2006 and has just turned around in the current year.

The company has seen margins rise from 4% to around 10% (excluding one time CER gains). The ROC is around 15%+. Sales growth has been 15%+ and NP growth has been 20%+. The company looks undervalued on current measures. However the key point is the sustainability of the margins in the chemicals business. It is diffcult to see how the division would maintain such high margins. If the net margin of the company were to drop to around 6-7% from current levels (which are roughly the average margins), then the EV/Net profit ratio would be around 9-10. At these levels the company is at best undervalued by 20-30%. Need to do more analysis.

9 comments:

Anonymous said...

Good study on SRF...Please add further

Anonymous said...

SRF is my watchlist as well.
Following are the key points which make the stock attractive

-- Low P/E ratio (around 3)
-- Carbon credits are going to be a regular contributor to income and not one time. (Rs 300 Cr/annum min)
-- Diversification away from low margin nylon cord. (chemical business, also talks abt petrochem plant)
-- debt can easily be retired

The negatives are-
-- Management not very transparent
-- There are talks of stock price manipulation to keep it at low levels (through circular trading)

Overall it looks a clear underpriced stock.

There is also an excellent analysis by ANANKRIS on moneycontrol.com message board.
Those really interested in this stock should definitely read his analysis of over last 6 months.

Alok

Rohit Chauhan said...

Hi alok

can you let me know where did you find the 300 Cr no. for Carbon credit ?

The management does not talk about it in the 2007 AR and keeps patting itself in that AR. In the current year's AR when the profits have dropped, they have made a mention. i was not able to find the exact no. for it.

In addition if the credits are this big, i would expect the management to give me more clarity on it (300 Cr would be 75% of the profit)

i had a look at the board discussion and some points come accross
- the whole valuation rests on the carbon credits
- expansion plans - moving out from the current low return tyre cord to other businesses
- possible demerger

personally this idea is moving into my 'too complicated and messy' file with management issues, non core sources of income, lack of tranparency . it may be a perfectly clear to others, but i am finding this idea complicated and messy to analyse.

Rohit Chauhan said...

the promoters issued themselves warrants for around 3.3 million shares in march 2005 at 85/ share when the market price was 225 +.

I am not comfortable with companies where the promoters gain at the expense of the minority shareholders. short term you may make money, but my own experience in the long term is bad.

The company may become an arbitrage opportunity if a demerger happens

madhavan said...

There's a post by Sanjay Bakshi on SRF. Might interest you:

http://fundooprofessor.blogspot.com/search?q=SRF

Anonymous said...

Following details were given by ANANKRIS on moneycontrol message board on SRF Carbon credits issued/sold.


SRF – CER ISSUE DETAILS

No.- Date of issue- Monitoring period- CERs issued
=====================================
01 - 16/01/2006 – 01/07/04 to 30/09/05 – 5,42,829
02 - 15/05/2006 - 01/10/05 to 31/10/05 - 6,72,271
03 - 15/02/2006 - 01/11/05 to 31/12/05 - 12,95,449
04 - 15/05/2006 - 01/01/06 to 28/02/06 – 13,12,676
05 - 03/07/2006 - 01/03/06 to 30/04/06 - 7,87,990
06- 04/09/2006 - 01/05/06 to 30/06/06 – 13,00,038
07 - 02/11/2006 - 01/07/06 to 30/09/06 - 9,34,701
08 - 21/03/2007 - 01/10/06 to 31/01/07 - 10,33,683
09 - 01/06/2007 - 01/02/07 to 31/03/07 - 7,71,925
10- 02/11/2007 - 01/04/07 to 30/06/07 - 9,72,340

Total CERs issued till date- 96,23,902

Further, issue of CERs 8,94,239 for the 11th
Monitoring period from 01/07/ 07 to 30/09/07 is in
the pipeline awaiting request from the Co.

Details of CERs sold:

Period( Qr) – CERs sold – Amount realized
(Gross Amt./PBIT)

March2006---- 1.40M -Rs. 93.85Cr/ 88.60Cr
June 2006---- 1.00M –Rs.133.83Cr/117.69Cr
Sept.2006---- 1.50M –Rs.148.82Cr/140.90Cr
Dec. 2006---- 1.15M –Rs.122.28Cr/112.96Cr

Total ---5.05M – Rs.498.78Cr/460.15Cr
( Upto the period Dec. 2006)

After Decemeber 2006 quantity of CERs sold and amount
realised not disclosed by the Co and CER income merged
with Chemical Business in the segmented results.

Segmented results relating to Chemical Business ( including
CER revenue )during the subsequent quarters given below:
Period – Net sales Revenue

March 07- Rs.140.04Cr
June2007- Rs.131.01Cr
Sept2007- Rs.127.69Cr
Total – Rs.398.74Cr

Considering quarterly average revenue from core chemical segment
around Rs. Rs.50 Cr,( in case of no volume growth during this period)
the element of CER income could be to the maximum extent Rs.250Cr ,
for the last 3 quarters from sale of not more than 2.5Million CERs.
This leaves not less than 2M CERs with SRF in addition to 0.9M to be
issued for the period July07 to Sep 2007.

SRF can generate 3.83M CERs annually from July 2004 and hence
entitled for 11.5 M CERs for the 3 year period upto June 2007. SRF
was issued 9.62 CERs during this period, short by 1.9M CERs. I presume that this shortfall can be due to stock of HFC to be incinerated/sold during this period and can be got issued in the subsequent period with in the overall limit of 3.83CERs per year. Storing of HFC gas is a continuous process where as the process of incineration of HFC is not. This is evident from the variations in CERs issued for different periods and incineration
plant shut downs during these periods.

Vijay said...

Hi Rohit,
considering that Grindwell Norton has fallen from it's November Lows (CMP 98) doesnt it look attractive at present. Low PE = 4, growth of 10% YoY and close to nil debt seems attractive to me. Moreover, it's competitors are trading at Higher PE's ( Carborundum (12), Orient abrasives (6)) ..

Rohit Chauhan said...

Hi vijay
grindwell is a good company, however the PE is not as low as you can see from the various website. i think grindwell had a one time gain of around 90 crs and hence the trailing PE appears so low.
that said, 98 is a good price for this company.

Vijay said...

Hi Rohit,
Yeah as you said the PE is apparently low because of one time income of 77 crores in the Sep 07 Quarter. Excluding that one time income, the effective PE comes to around 10.

Thanks for pointing that out! .. I totally missed it..
Vijay