April 18, 2009

Analysis - Balmer Lawrie

About
Balmer lawrie is a diversified government owned company. It has the following diverse businesses
- Industrial packaging: Drums, barrels etc
- Logistics infrastructure and services
- Travels and tours
- Greases and lubes
- Tea
- Others

The company is a profitable PSU, a zero debt company and now has surplus cash on its books.

Financials
The financial performance of the company has been improving steadily from an ROE of 12% in 2004 to almost 24%+ in 2008. The Topline for the company (includin JV and Subs) has grown from around 1100 to 1788 in 2008 giving a CAGR of 10%. The bottomline has improved from 31 Crs to 99 Crs in the same time period indicating an improvement of profitability.

Positives
The topline has grown by 10%, however the netprofit for the company has almost tripled in the same time period. The company has now become a zero debt company (including JV and subs) now, with surplus cash on its books
In addition the company management realizes the importance of allocating capital . They have indicated that they are looking at exiting low profitability businesses like tea and invest in the more profitable ones. This is also visibile from the improvement in profits over the topline.
In addition the excess cash has been used to reduce the debt too.

Risks
Everything said and done, this is still a PSU. So there is always a risk that the government may do something stupid. However in the recent past the profitable PSU’s are being allowed to operate with autonomy (barring the Oil PSU’s). Still a risk exists.
Almost 60% of the profits come from the logistics and infrastructure serivces division. So any drop in profitability of this division could impact the company strongly.

Management quality
The PSU label seems to indicate that the management quality is poor. I think that would be as wrong as saying the MNC label indicates good management. Each company and its management should be evaluated based on its own merit.

Management compensation – Being a PSU, the compensation is a bit too low.

Capital allocation record – The management has had a good and sensible record of capital allocation. They ROE has been increasing steadily over the years due to the management focus on better performing PSU such as tour & travels, logistics and divestment of the poor performing businesses such as Tea (in UK), projects etc. In addition the management has reduced debt and also increased dividends.

Shareholder communication – Fairly decent. The management has regularly discussed the strenghts and weaknesses of each SBU, plans for each of the businesses and have been transparent on the downside risk of each business (may be a bit too pessimistic)

Accounting practise – Good. I don’t see any aggressive accounting.

Conflict of interest – None from the management. However the majority shareholder is the government. Till date there has been no interference.

Valuation
The company sells for around 3-4 times the cash flow for 2008-2009. With an ROE of 20%+, and a moderate 10% net profit growth, the instrinsic value seems to be around 1500 Crs or higher for the whole company.
An alternative approach to valuing the company would be to value each division individually as some have great economics such as the logsitics division and some horrible, such as the Tea division. The sum of parts valuation of the company is loaded in the google groups
here

Conclusion
The company seems to be selling at greater than 50% discount to instrinsic value. It seems to carry a PSU discount to its valuation too. Finally, the company has a dividend yield of almost 5%+ and this dividend yield look sustainable too.

disclaimer : I have a holding in the stock.

12 comments:

hari said...

Hi Rohit,

In this article you have mentioned that the accounting in the company is not aggressive.
Could you please explain this as I can't understand what it means.
Also could you please confirm as from where you are getting information related to the Allocation of Capital.Is it mainly from the Annual Reports ?

Thanks,
Hari

Santosh Nair said...

Hi Rohit,
I have some questions as I am not familiar with the Indian exchanges. As per the comapany's investor relations website, this stock is listed on both NSE and BSE.

1) What is the advantage of listing on different exchanges in the same country as there must be costs involved in listing? Is it to get exposure to more investors and increase liquidity as the two exchanges have different clientele?

2) Does this lead to arbitrage opportunities? I believe the closing price for this stock was different on both exchanges but can't really confirm.

3) The company's website lists the symbols as follows:

Bombay Stock Exchange Ltd.
523319

National Stock Exchange of India Ltd
BALMERLAWRIE

Strangely, searching on yahoo for the company brought up this result:

BALMLAWRI.NS BALMER LAWRIE & CO LTD NSE

BALMLAW_a.NS BALMER LAWRIE & CO LTD NSE

Two listings on NSE with slightly different prices. No sign of BSE listing.

Being familiar with only US exchanges (NYSE & NASDAQ), I find this quite confusing.
Any clarifications in this regard appreciated.

Thanks,
Santosh

Rohit Chauhan said...

Hi hari
aggressive accounting is a fairly broad topic. example of aggresive accounting would booking revenue earlier than actual sales or even if the returns are possible, writing off assets to reduce depreciation expense and massage future earnings etc. In a nutshell, aggresive accounting involves lumping losses together so that the future profits can be artifically inflated.
the capital allocation information is not explicit in the annual report. you have to see how the ROE is trending and what kind of investments the management has done and what kind of returns they have got in return

regards
rohit

Rohit Chauhan said...

Hi santosh
NSE and BSE are two main stock exchanges in india.
traditionally companies were listed on BSE and some regional exchange

the NSE was started a few years back and i think (not sure though) it must be the largest exchange now. so companies are listed on it.

so i think these two exchanges are the largest in india and hence most companies are lised on both

i am not sure if there arbitrage present to a large extent, especially after the bid ask spread and commission
not sure why yahoo has balmer lawrie listed in that. try looking it up on google finance or some indian financial website

regards
rohit

Santosh Nair said...

Thanks Rohit.
I looked up Google too. It's got 3 listing for NSE:

BALMLAWRIE (this seems to be actual symbol - closing price 287.95)

BALMLAWRIE.RL
BALMLAWRIE.BL

On BSE:
523319 (closing price 290.20)

I guess I will have to get used to the BSE and NSE symbology.

Regards,
Santosh

Anonymous said...

dear rohit sir
i am an indian army doctor following u veryfaithfully.
so had a handsome gain from oct08 portfolio
but i sold off balmer at 250 price since ur blog says 5-8% return
sir i am still a novice at exit strategy shall i enter it at current levels too

Rohit Chauhan said...

Hi hari
you can read this thread on TED - http://www.theequitydesk.com/forum/forum_posts.asp?TID=1964

it talks of all the aggresive accounting going on , especially around forex losses

regards
rohit

Neeraj said...

hey rohit..
dsnt it bother u that the company has too many unrelated businesses..dsnt this affect mgmt efficiency? diversification is fine..but this is takin it to the limit a bit huh? ;-)
neeraj

Rohit Chauhan said...

Hi anonymous
my personal goal is to beat the market by 5-8% (not 5-8 % returns) which translates into approximate returns of around 18-23% per annum on portfolio basis.
this is my personal goal, not something i am recommending for others
I also do not give buy or sell recommendations on specific stocks and leave it to the readers to make their own decisions
regards
rohit

Rohit Chauhan said...

hi neeraj
the wide range of businesses is more of legacy of the company. i would personally prefer if the company exited the businesses with poor returns. however it may not be as easy as it looks as this is a PSU and there are labor and other issue involved with the poorly performing SBU
finally, on an aggregate basis the management is still doing a decent job and moving the right direction.
that is much more than what you get from almost 90% of pvt companies
regards
rohit

Anonymous said...

Nice review Rohit.
My calculations also on the same line. Intrinsic value of the company comes around 1650 crores. That brings IV Rs. 1000 per share.
CMP is at 71% discount of IV.

regards
Ani

Anonymous said...

Rohit..
Balmer Exiting Domestic Tea market.

http://www.hinduonnet.com/thehindu/holnus/006200904231552.htm

regards
Ani