July 1, 2009

Result review – NIIT tech and Cheviot company

NIIT tech
I have written on NIIT earlier (see here).

NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call

- Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
- The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
- Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
- The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
- The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.

Overall, the results have been as expected and not really spectacular. However the current valuations continue to assume much worse and hence the stock continues to be undervalued. I have updated the valuation spreadsheet and uploaded it again

I personally feel, that my net margin assumption of 7.5% may be too conservative and the company may be able to maintain net margins in the region of 10%. If that turns out to be the case, there could be a higher upside to the stock price.

Cheviot company
I have
analysed cheviot company earlier. The main thesis behind this idea can be summarized as follows – the company net of cash and equivalents is selling at 1 or less times annual earnings.The company has an average earnings power of 14-15 Crs per year and can valued at around 200 crs (versus 80 Crs market cap).

I recently reviewed the annual report and did not like what I saw, mainly on how the company is using the excess cash. A few key points from my annual report analysis are

- The company recorded a topline growth of around 5% (inspite of a drop in volumes) and a bottom line which was flat or up a few percentage point (one needs to exclude the impact of other income which is mainly from equity investments and mutual funds). The same is visible in the cash flow from operations too.
- The operating and net margins from core operations has remained steady inspite of the turmoil in the export markets and other issues such as labor.
- The investments on books have dropped by 20 crs and there seems to be an unexplained loan/ advance of the same amount on the balance sheet. The company had invested the surplus cash in the equity markets and has seen a drop in the value of the holdings. The company also took some losses through the profit and loss statement due to the sale of some holdings.
- The outlook for the next year looks bad due to the high jute prices and recession in the global market. The bottom line and hence the stock price could remain depressed.

So why am I annoyed with the results
- For starters, the company has taken the surplus cash and invested in the equity markets. That does not seem to be their core skills. In addition, I don’t think they have done a great job of it anyway. The market value has dropped by 50%, which seems to be roughly in line with the market level. So the treasury department is barely keeping up with the market or earning a few points above it.
- The dividend payout has been reduced this year due to the drop in profits (from other income). I am fairly irritated by this reduction as the company is drowing in cash, does not have too much use for it in the core business and is investing it in the stock market (not too well )
- There is an unexplained 20 Cr advance to someone. There are no other details provided on this transaction. This is not a related party transaction, but at the same time I would prefer more disclosure.
- A donation of 3 Crs (LY 2.5 Crs) !!

I am annoyed mainly by the capital allocation skills being displayed by the management. They are holding excess cash and are neither able to deploy in the core business and at the same time not ready to return it to the shareholders.

I have been slow in learning this fact, but catching onto it – Managements which show poor capital allocation skills and hoard cash, destroy value and the market may never assigns a decent multiple to such a businesses.

I do not have plans to sell the stock, but plan to monitor it closely. If I don’t see an improvement or change in the capital allocation policy of the management, I may decide to exit the stock.


sumi said...

Thanks for the NIIT template

Avadhut said...

Hi Rohit,
Thanks for the analysis.
One query about NIIT DCF Calculation:
Intrinsic Value you have taken combination of NPV 2005-2009+ Terminal Value.
Can you please elaborate it? ( I think it should be the Cash Flows from 2010 onwards and then discounting them).


karthik said...

Hey Rohit,

What will be effect of all this dis investment talk on Balmer in long term?


Rohit Chauhan said...

Hi avadhut
you are right ..a proper valuation would be based on 2010 cash flow and onwards

i have done a very rough back of the envlope calculate. i have used the following formulae in the spread sheet
- 14*earnings (2011)+cash on books - forex losses - options cost / share count (after accounting for all options).

so the first part of the formulae - PE of 14 can be calculated more accurately using the DCF model. but in view of the low valuation, i decided to take a shortcut.

Rohit Chauhan said...

Hi karthik
the divestment could remove the discount in terms of valuation. however balmer lawrie's management is quite good and i would not expect someone else to do a better job than them.
i personally am not taking divestment into account as it is not possible to evaluate it. if it happens it would be a bonus for me.

Anonymous said...

Hi rohit good analisys of Cheviot.Can you please through some light on ai champdany it`s the company in same sector as Chevoit.It`s business is growing and EPS : 5 for 2009. one can hold for how long?

sachin8778 said...

Hi Rohit,

Your numbers for sales etc (2009 in anal worksheet) are not matching with MoneyControl or company AR for that matter. There is huge difference, I think I am missing something. Could you please explain?


Rohit Chauhan said...

Hi anon
i did not get the name of the company you mentioned

Hi sachin
i assume you are referring to the NIIT worksheet ? my bad - only the first workseet - ratio analysis is for niit tech. the other worksheets are for some other company which i did not clean up.


Ninad Kunder said...

Hi Rohit

I think you need to worry about Chevoit becoming a value trap.



Anonymous said...

Hi sir the company AI CHAMPDANY(532806) can you please through some light on it.

Rohit Chauhan said...

Hi ninad
yes i think that may be the case. the management runs their core business efficiently, but at the same time is hoarding the excess capital.
unfortunately with a 70% promoter holding, i fail to see why they are not focussed on creating value ..the promoter would benefit the most in that case


Ninad Kunder said...

Hi Rohit

In your mind there is a differnce between the promotor-manager and the promotor-shareholder. The promotor-manager would do the right things to enhance value for the promotor-shareholder.

But in small organisations where there is no institutional presence this doesnt work. The promotor manager doesnt exist and the promotor-shareholder runs the company. You are asking him to share cash with the minority shareholders which he believes is anyway his.

It is a imp mindset to understand in the Indian context. So like I always say the starting of point is the promotor and not the balance sheet.



Rohit Chauhan said...

hi ninad
unless one has direct access to a promoter, the only way to judge or read his mind is via their past actions.
even though small companies are run by these promoter shareholders, some of them fail to realise that if they take value enhancing actions, they will benefit the most.

if they distribute the surplus cash, the value of the company net of cash will increase and they will benefit the most.

the problem is that most of these promoters dont understand these points