August 9, 2008

Analysis – Ashok leyland, Suraj diamonds etc

I had suggested to the readers of this blog a few weeks back to send me a list of companies to analyse. I am posting on a few from the list

Ashok Leyland – I have written on Ashok leyland
here and here. I have been analysing the annual results of the company for 2007-2008 and the key points are summarized below

Postitives :
The company has maintained its ROE and capital efficiency (Wcap ratio) inspite of tough market conditions. The sales growth was around 6%, which is decent in view of the slowdown in the Commercial vehicle markets. The netprofit growth and margin were also satisfactory. The company has also improved its market share in the current year.

In addition to the above, the company is investing in capacity and also in R&D (at 2%+ of sales). The company is also investing in several JVs for exports, electronic components for vehicles etc.

Negatives :
Competition in the industry is increasing with a lot of foreign players coming into the country. As a result the obsolence of models will speed up. There would also be a higher spend on R&D and Marketing to manage the competitive pressure.

The company is also expanding internationally which in itself carries a higher risk.
The company is a cyclical industry where the demand could be weak for some more time. This is strictly not a negative as the long term competitive advantages of the company are still intact.

I have uploaded a detailed analysis of Ashok leyland in google groups
here (valuationtemplatev2ALLaug2008.xls)

A valid question would be – Why not invest in tata motors which is the clear industry leader. To that my response is – Tata motors as a company is too complex for me (maybe not for others) to analyse. The company has a lot of moving parts now. It a heavy vehicle, car manufacturer combined. In addition with foreign accqusitions of Jaguar and other brands there are additional unknowns too. In comparison AL is a much simpler company to understand and analyse. Hence my preference for Ashok leyland.


Suraj Diamonds
The company is in the diamond cutting and jewelry business. The revenue has grown by almost 300% in the last 5 years and so has the net profit. However the net margins are very low at around 2-3%. In the addition the ROE is less 10% even after improvements in the last few years. The company has low free cash flows. The net profits in aggregate are around 130 crs in the last 5 years. However around 50% have been used up for fixed asset and working capital. There has been a huge increase in the debtors position which is now around 1 years sales. The company looks cheap from a net profit perspective, however I am not too impressed by the ability of the business to generate free cash flow. There is fairly high increase in debtors which is quite risky in my opinion.

I would personally not proceed further with this stock untill I see the company is able to improve its free cash flow generation. The risk in such stocks is that the faster the company grows, the more capital either in form of debt or equity would required. This is fine in the short term, however if the business model generate poor free cash flows, then the stock only appears but is not really undervalued

A few additional companies have been emailed to me, which I have analysed in the past. I am providing the list and the links below

Maruti
HPCL – see here and here
Kothari products – It is still a net cash situation and an arbitrage opportunity too.
VST industries

6 comments:

Anonymous said...

Hi Rohit.
I want to learn stock analysis like you do. how do i start? I have 10 added seimens & 2 L&T today to my portfolio as L&T bonus record date is nearing so i am expecting few gains. and Seimens price (Rs.550) is attractive as compared to 900 ex bonus couple of months ago. Beyond this i have no stock picking knowledge.

Please help me in doing the initial analysis of any stock (for ex L&T & Seimens). Also i have sent you my portfolio. Till January 2008 i was in 40% profit..but now 40% loss.

Kind regards
Ani

hardtoget said...

Hi Rohit,

whats your take on
Bihar Caustic & Chemicals Ltd
is it worthy of a value buy

Thanks & Regards
Harold

Rohit Chauhan said...

Hi ani
i will post on the approach soon, however i cannot do portfolio analysis for you or anyone else. i will explain my approach and you can try it out for your portfolio

harold - i have not analysed the company.will have a look and let you know

Anonymous said...

Thanks Rohit.

From the long term investment perspective i figured out Tata Investment Corp & Sterlite Technologies. what is your say on both?
Link for SterTech
http://www.moneycontrol.com/india/stockpricequote/cablestelephone/sterlitetechnologies/10/37/profitloss/marketprice/ST20

Link for Tata Inv.
http://www.moneycontrol.com/india/stockpricequote/financeinvestments/tatainvestmentcorporation/10/58/profitloss/marketprice/TIC

Thanks
Ani

InvestNTrade said...

Hi Rohit,
I am only 10% value investor so far and have identified my first company to invest in .It is chennai petro , so far I have only checked initial parameters. I wanted someone expereince like you to analyse this company as i would like to see if am doing things in right manner. Please do reply on my personal mail id of amberg@juniper.net also.

Regards
Amber

Anonymous said...

Hi Rohit,

After the recent turmoil in Indian auto industries(Tata Motors etc including Ashol Leland), do you think Ahok is an investment candidate, of course considering from the long term. From the short-medium term I feel they are all going to be hurt and also feel that your investment cycle period of 3 years may not be sufficient to get a decent appriciation in current situations ! Please provide your opinion !