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