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.