December 25, 2007

From Value to momentum – MRO TEK

I generally select and buy stocks where the general enthusiam for them is very low. None of my picks shoot up after I have bought them and so when a few did in the last few months, it was a new experience for me.

One such pick was MRO-TEK. I started looking at the Company a few weeks back when the stock was at around 52 per share. My analysis was as follows

About
The company is primarily into end-to-end solutions and hardware/products-provider in data communications, data access and networking fields, offering a wide range of sophisticated LAN/WAN products.
The company has a JV with RAD corporation and a few other technical collaborations. The company had a split of 30-70 of manufacturing v/s trading a few years back. In the recent years, the split has reversed to around 70-30 in terms of revenue

Performance
The company has had very erratic performance. The projections which the company made at the time of the IPO in 2000, were never met (by a huge margin). Since then the performance has been one step forward and one step back. The ROE has fluctuated between 5 and 15 %. Topline has also fluctuated and has grown by 9% per annum and the Net profit has also grown by roughly the same amount.

The margins have held steady at 9-10% and the asset turns have improved from 1.2 to 2.6


Positives
The company has maintained its margins and improved its efficiency ratios. Wcap ratio has improved from 1.5 to 6 due to improvement in inventory and recievable turns. The company has freed up cash and as a result has no debt and almost 40 Crs of cash on the balance sheet.
The company recently completed a buyback program using the surplus cash. The promoters have also been increasing their holding % in the last few years. The company has been paying a decent dividend with a DPS/EPS of around 30-40%.

Negatives
Although the management appears rational, pro-shareholder and is trying to create value, their performance has not been up to the mark. Reading the annual report reminds me of kids in school, who study hard and have the right work ethic, but still manage to flunk one or two subjects each year.
The company operates in a very competitive field with competition from likes of CISCO and LUCENT etc. This industry involves a lot of new technology, high R&D expenditure and high rates of obsolescence. MRO has only recently started investing in R&D and till recent past was mainly a distributor of networking products.

Conclusion
My personal estimate of intrinsic value was around Rs 90/ share. At 52 / share, the company was not a screaming buy, but worth creating an initial position.
I am not too optimistic on the long term economics of the company as this is a very small company in a fast paced and competitive industry. As a result it is diffcult for the company to operate at the top end of the product range and make good margins. Due to my lack of confidence on sustained good performance I conservatively estimated the intrinsic value at around 90 /share

Post script
Once I complete the analysis, I write a single page note detailing my investment thesis. This is more to record my thoughts at the time of the decision. It is useful to keep such notes as I can check them again later and check if my assumptions were true or not.

Well in this case, it never came to that. Almost from the next day the stock suddenly caught the fancy of the market. Somehow everyone has a very different opinion and as a result the stock is up almost 50-60% since then. In my case after creating an initial position, I stop buying it. Personally I buy at 40-50% of my estimate of intrinsic value and if the stock sells above that I don’t do anything. You may think I am leaving money on the table, but I prefer to follow a discplined approach. In my case I am not comfortable with trading and momentum plays and prefer to leave it to other who are better at it.

Valuation logic – 2008 EPS around 6-7 / share
PE ( will explain logic for this in a different post ) = 9-10
Cash / share = 40 Rs/ share
Total = 94 – 110 Rs/share

11 comments:

paddy said...

Hi Rohit.,
I have just started reading your blogspot. It is interesting and I learn a lot. thanks for the experience. (1) Have you looked at House of Pearl fashions - it is quoting 50% less than the IPO price. It is a company with good fundamentals and profit figures. is this a good candidate for your value pick? have you ever analyzed this stock? thanks Venu

Rohit Chauhan said...

Hi paddy
i may have looked at the wrong company , but the company seems to have a profit of 4 crs, mcap of 500 cap. their performance has been very erratic on top of that. unless i am missing something completely, this is not a value play at all
IPO price and 50% discount to that price is incidental and should not be used as a basis for valuation

VISHNU said...

Hi Rohit,

This company came in to my radar few months ago (as buy- back candidate)..

Still I am not sure about the Business Dynamics..There were lot of floppy disc companies in US which were vanished within 5-9 years..

Regards
Vishnu

Sujit@FIS said...

I've just started reading about investing in stock. I read your article. It is very much informative,interesting...
I like this type of analysis, which helps others.
Thanks...

paddy said...

Hi Rohit.,
Thanks for enlightening me on the House of Pearl fashions. You are right about erratic revenues. thanks for quick update.Regarding your earlier value pick HPCl, it is currently quoting at 340. Do u still belive it is a value pick at this price?.
thanks Venu.

paddy said...

Hi Rohit.,
Sorry to be bothering you with a lot of questions on some shares and checking with you whether it is a value buy. I have hunches and go by what the analysts recommend. I filter these recommendations and feel some of them are really good value pick. But I request your technical expertise and experience to validate so that we can initiate a 'buy'. Do you feel that the following stocks are value buy
- Lakshmi electrical control systems (very very low equity, LMW group company, high eps owns 88000 shares of LMW)
- Zuari industries (diverse fields, fertilizer, investments, seed)
- Albert David (very good and growing eps but the price has stayed the same level)

thanks and regards.,
Venu

Rohit Chauhan said...

Hi venu
i am sorry, but i cannot give a buy or sell recommendation. that will have to be your decision. atbest i can share my opinion which may be based on a quick look at the company. however i would advise you against making a decision based on that
rgds
rohit

Anonymous said...

Hi rohit,

As you've probably heard by now all that so called "momentum" in MRO Tek is for one and only one reason. Rakesh Jhunjhunwalla has picked up a big stake in it. Obviously the insiders who knew were busy stocking up and hence the sudden rise! So much for fundamentals, it truly is mad season! But a great post on it all the same. Thanks and keep up the great work!

Mark

Rohit Chauhan said...

Hi mark
i was not aware this development. however once the stock crossed my estimates, i sold out. there maybe more value still ..but i cannot see it
regards
rohit

Abhishek said...

Hi Rohit,

MRO-TEK is quoting at around 25 now. Have you given a relook at this stock recently? On the face of it, this year's results were quite bad.

Abhi.

Rohit Chauhan said...

Hi abhi
need to check the results. have not checked bad for quite some time on the company