June 14, 2010

Quick analysis - Patels airtemp

About
Patels airtemp is in the business of condensers, heat exchangers and air conditioners. The company is in the same industry and business space as Blue star limited which is a better known company. You can find more about the company
here

Financials
The company has been business since 1973, but has started doing well for the last 5 years. The ROE of the company has increased from 7% to around 30% in 2009. The company is almost debt free and may have some excess cash by the end of 2010.

The company had a revenue of 72 Crs and 8.7 cr net profit in 2010.

Positives
The company has grown its topline by more than 30% and bottom line 40%+ in the last 6 years. However at the same time the growth has come from extremely small base. The company has paid off its debt and is now debt free.

The company has a fairly diverse clientele and supplies its products to a wide variety of industries such as cement, chemicals, petrochemicals, textiles and engineering. In addition the company has the benefit of an ever expanding and growing market for its products.

Risks
The company is in a very competitive business with competitive advantages related to scale of operations. A substantial portion of the business comes from projects which involves competitive bidding. The company has started growing in the last few years and it remains to be seen if the company will scale up and enter the big leagues.

The current margins are in the range of 10%+. Blue star which is in a similar business has margins in the range of 5-7%. The ROE for both the companies is in the same range as Blue star is a more efficient user of capital compared to Patels airtemp. The efficiency is mainly to the size of the company. The difference in margins could be due to the pricing/ quoting approach of the companies.

If blue star is more aggressive in bidding, then we are likely to see Patels airtemp follow the same path if it intends to grow beyond the current size. If this happens, we are likely to see a reduction in net margins, though the bottom line could still grow with the topline.
Bold
Conclusion
One can look at the financials of the company and assume that patels airtemp would continue to grow at the same rate. If one can make an assumption or have a strong reason to believe that the performance of the last 4-5 years will be repeated then the company is a bargain.

At the same time, one should also consider the fact that the company has been in the biz since 1973 and managed to grow to just 16 crs in the first 30 yrs. The rapid growth and improvement in the performance has come in the last 6 years.

I personally have not been able to make up mind on which scenario will play out and plan to follow the company and dig deeper. It is easy to assume that the company will repeat the performance of the last 6 years, declare the company to be undervalued and buy into it. I however would prefer to investigate deeper and watch the company for a while before buying into it.

15 comments:

ramurthy said...

what is that managed to just 16 crores

Alok Bhola said...

"At the same time, one should also consider the fact that the company has been in the biz since 1973 and managed to grow to just 16 crs in the first 30 yrs. The rapid growth and improvement in the performance has come in the last 6 years."

For determining whether the 30-yr growth rate up to 2003 was faster or slower than the past 6 years, we need the turnover figure for 1973. The figures for 1983 and 1993 are also needed to determine the growth rates for each 10-yr period since the formation for proper perspective.

Amit said...

Hi
Not sure if comparision with Blue Star is fair as Blue Star is more into Cooling which in the recent past has been driven by growth in organised retail space, office space driven by growth in IT/ITES etc. On the other hand Patel drives majority of revenue from Heat Exchanger which is driven by industrial growth such as refining, power etc....so the driver are very different.

Swing Trade Guru said...

Hi Rohit,
Educative post. Have you ever tried technical graphs etc for trading or investments? There are scrips that shoot up 10-20 % in a day and about 50% of more in a month. If value based long term investing also gives you the same kind of returns, why not do momentum stocks?
Any thoughts?
Indianswingtrader

Vic said...

Hi Rohit,

Thanks for the quick analysis.

I know you like to analyze companies with routine, boring businesses. But I think it is also beneficial to analyze established businesses that are taking on the next Growth areas. For example, recycling or green industries or let's say Organic products or certain biotech/pharma etc.

It gives us big upside. For example, I was looking into Bilcare.

Thanks,

Vikas

Rohit Chauhan said...

Hi ramamurthy
not sure if i understand your question ?
why only to 16crs ? i dont know the reason ..but its apparent the company has grown in the last 5 yrs rapidly

rgds
rohit

Rohit Chauhan said...

Hi alok
i would not do that kind of analysis as you would be dealing with very small numbers ...anything less than 3-4 crs is not meaningful in this biz and growth numbers are not representative

if the company grows from 50 lacs to 1 crs ..a 100% growth is not useful for any projection

Rohit Chauhan said...

Hi amit
you are right ..patels airtemp is in the same biz as thermax and blue star ..though the products are different the economics of both the biz type are same.
so one can compare patels to either blue star or thermax

rgds
rohit

Rohit Chauhan said...

Hi swing trader
maybe you can make money that ..but thats not my approach and i am not interested
everyone needs to define their circle of competence and focus

rgds
rohit

Rohit Chauhan said...

hi vikas
thats true ..as long as one does not overpay for it.
the downside is that such industries do not have too much past history and hence one needs specialised and indepth knowledge to make a successful investing. its more like VC investing that value investing

btw, i have not idea how green tech or biotech will play out. but one can look at FMCG or other companies and do well.

one additional point - dont mistake excitement with good investment. sometime boring biz are better investments than the exciting ones ..remember the dotcoms ?

rgds
rohit

Anonymous said...

Hi,

What do you mean by "watch the company for a while"

How would that help you in the investment process?

Prasanta said...

Have you got any idea about the management? Has there been a management change in last 5 years that changed the focus of the company?

jagadish said...

Kilburn engineering,GEI industrial and Alfalaval's Heat exchange division are direct comparables for profitability and other valuation measures. Sales growth is not much attractive in patels airtemp, recent improvement in profitability is becoz of falling Rm cost, this may not be sustainable in future. Valuation may appear attractive as co is earning cycle peak margins. Net cash position is a favorable factor. co is earning attractive return on capital employed.

Jean said...

Thank You Rohit on your view on Patels Airtemp.

I have a good report card for it:
http://valuestocks.in/Pages/ReportCard.aspx?CompanyName=Patels

The Value Investing Parameters are green for the above scrip. Please have a look.

Rajat said...

Hi Rohit

Are you still tracking this one? Request you to share your recent analysis/comments on the company. Do you think with the change in govt and an expected uptick in industrial capex of the country, Patels will get benefit of the same?