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.

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