October 7, 2009

Analysis - Sulzer India

About
Sulzer india is a 200 Cr company in the business of mass transfer technology (mixers, separation column etc) for industries such as refineries, chemicals, gas processing etc. The company is a subsidiary of Sulzer chemtech AG. The parent also has a fully owned subsidiary – sulzer pumps.
Sulzer india has received technology support from its parent, which holds 80% of the equity in the company

Financials
The company has maintained an ROE in excess of 25%, with the number increasing to around 40%+ in the last 2 years. The company’s total asset base is almost same as the cash balance, so net of cash the invested capital is a very low amount. In addition the company also has a source of additional capital – customer advance which reduce the net capital requirement in the business.
The sales have tripled and net profits gone up by more than four times in the last 4years. The company is debt free and now operates with negative working capital

Positives
The company operates in a knowledge and technology intensive industry. It is supported by the parent in terms of technology and technical transfer. The company also has a strong balance sheet with excess cash and has demonstrated a decent growth record in the last 5 years.
Finally the company has maintained a decent dividend payout ratio in the last few years

Risks
The key risk in my mind is the lack of in depth information available on the company. The annual report is fairly sketchy. The parent holds 80% of the company and has attempted to delist the subsidiary in the past. As a result, I personally don’t expect them to care too much about their Indian shareholders. The tone and disclosure in the annual report seems to reflect the lack of interest on part of the management for the minority shareholder.
The core business of the company is fairly healthy and the company should continue to do well in the future. The risk is how much the minority shareholder will benefit directly from the value creation.

Management quality checklist

- Management compensation : The management compensation is not excessive and appears to be on the lower side
- Capital allocation record (dividend, ROE, excess cash, acquisitions etc) : seems decent with reasonable payouts in the form of dividends
- Shareholder communication: sketchy and poor.
- Accounting practise: appears conservative
- Conflict of interest: Though strictly not conflict of interest, the company pays 2% of sales as royalty to the parent. There is no explicit conflict of interest.
- Performance track record: The business performance has been good even during the downturn.

Conclusion
The company sells at around 11 time current earnings with cash levels in excess of 10% of the market cap. In view the fundamental performance, the company could easily be valued at 20 times current earnings. However fundamental performance is not always the sole determinant of value. In cases such as sulzer, which are MNC subsidiary companies the business performance does not always translate into shareholder returns as long as the management does not take specific measure to improve shareholder returns.
Sulzer has tried to delist the company in the past and current holds 80% of the stock. I will have to stretch my imagination on the point, that the company will suddenly start looking at improving the returns for the minority shareholder. In such a scenario, it is quite difficult to put an appropriate number on the intrinsic or fair value of the company.

Disclosure : I do not currently hold the stock. I may or may not buy the stock in the future and may not declare my holdings. Please read my disclaimer at the end of this blog.

Additional message
Let me take a break from our regular broadcast. I am currently looking for two things and would appreciate if any reader can help me on it

- I am looking at someone with the requisite technical skills, who can help me make changes to my blog layout and design. I can workout an appropriate payment either in cash or kind (you redesign my blog and I provide advisory service for your portfolio). If you know someone or can do it yourself – please write to me on
rohitc99@indiatimes.com or leave a comment.
- I am looking at developing an automated spreadsheet for filtering stock based on various preset criterias by pulling data automatically from a public websites. I am not sure if this can be done and would appreciate any feedback on the feasibility of this requirement.

12 comments:

Anonymous said...

Hi Rohit,

I am not a programmer(haven't touched code for quite some time now) but -
1. This should be very easy to do. In fact you should be able to do it yourself if you apply to it. Alternative you can rope in a programmer from India.
2. I think you can write a program which opens up a xml input file(to make the input query customisable) to build queries then is able to submit queries to the websites you want to search. Collate the date into a csv file which can then be opened by excel. This excel template can also be programmed with macros to reduce the cleaning up and graphing work you need to do...
The fastest way to do this would be through vb.net, its free! -
http://www.microsoft.com/express/vb/Default.aspx

About Sulzer. This is a very old company and has been around for at least the last 20 yrs. They are profitable but seem to have been a laggard as far as growth is concerned. I don't know what the problem is, maybe a lack of interest in growth. But with India shining and exploding, they are going to have some easy growth and therefore are worth exploring I guess...but then I do not understand the space they are in and also since they are in the tech/knowledge industry they are subject to the vagaries of tech obsolescence and will have to keep investing in r&d. My reasons to stay away from Sulzer :(

-Vidyanshu

Rohit Chauhan said...

Hi vidyanshu
thanks for your comment. i have very very limited programming skill ..actual 0 skills. the other issue is also motivation ..would prefer to read an annual report than try figuring out how to build the code for the auto interface :)

on sulzer, the company has just started growing and that too it is erratic ..the key problem could be management focus.

rgds
rohit

Neerav said...

I agree about company not giving good information. Latest Quarterly reports show that the profits have risen due to Raw material cost becoming half (even though sales have fallen). I could not find out what constitutes these Raw Material anywhere in their annual report. It could be petroleum derivatives or Steel etc.(prices have fallen in both cases. this is definitely a difficult business to understand

This means that this increase in margin is not due to efficiency and the margins are very likely to fall again in future.

Rohit Chauhan said...

Hi neerav
look on pg 21..their main RM is steel, steel plates etc
rgds
rohit

Indrajeet Singh said...

I passed on your mail id to a friend who's brother does this work of designing and maintaining websites

As regards your second point, there are options at these sites like nseindia to pull data though I still don't know exactly how to get it but should not difficult technologically

I have also seen some software products selling for few thousand which download this data to desktop. can't remember immediately but will try to find

Btw I am also trying to write blog on value investing http://valuestocksinindia.blogspot.com/ but get very limited time -very few random thoughts not well researched one like yours

Indrajeet

Vic said...

Hi Rohit,

I'm seeing some ads now on your website, don't recall if I saw anything like this earlier.

Vikas

Rohit Chauhan said...

Hi indrajeet
thanks for forwarding my mail to your friend

hi vic
thats true, i have added google ads and donation ad for CRY on my blog. will be writing a post for the donation piece soon

regards
rohit

perspicacious said...

Hi Rohit easy way out, search on ICICI direct custom search on each parameter, paste the output to excel. All parameters output should be on one sheet in different columns. Then use the Data Consolidation Featrue and check the consolidate by row and column. After that create a new column on the right most and use count function to find stocks that meet most parameters. Repeat once a week till rich :-). I can mail you a sample,whole thing takes less than 5 mins, and then u can select the most promising for annual report info.

Rohit Chauhan said...

Hi perspicacious

i have been doing exactly that ..but its still painful and manual

rgds
rohit

Amit said...

Rohit

You may want to check out edelweiss.in which offers a pretty good stock screener, in fact the best in India - they have tried to follow the Google Finance screener. You should not need to scrape data off websites after all, I guess!

I think the site is the first good stab with a little bit of thought about what investors should probably be looking for (like consolidated results). Anyways, check it out.

placid prattler said...

Hi Rohit,

I have done a basic macro programming in excel which retrieves the data from a website (in my case the businessline scoreboard), combines all the various information spread across various pages into a single file and does some basic formula for PE ratios, Market to book value ratios. I have customised this for my computer - by giving the folder names I use to save my stuff. I can share this with you after some minor modifications of what exactly you need updated in your spreadsheet. I'll try, I do not promise :) Let me know, my email id is sathvik.nishanth@gmail.com

Bala said...

Check out www.billcara.com it provides rsi based sorter, which can be used to track entry point and exit point.