September 20, 2010

Annual review 2010 – Balmer lawrie ltd

Balmer lawrie is a decent size holding for me and hence I make it a point to review the annual performance in detail. The annual report for the company was published recently and I have been looking at it. Following are my thoughts on the performance of the company –

I have written about the company
here earlier. The company has been doing fairly well and the management has been moving the company in the right direction. The changes are not obvious from the overall results, but if one analyses the individual businesses of the company, the picture turns out to be much better.

Let me list some statistics (for last 6 years) of each of the SBU of the company and then give my thoughts on it
Industrial packaging (steel drums/ barrels etc) – Revenue growth per annum: 14%, Profit growth: 29%, Average ROCE: 18%+
Greases and lubes – Revenue growth per annum: 19%, Profit growth: 26%, Average ROCE: 15%+
Logistics (the largest division in terms of bottom line) – Revenue growth per annum: 8%, Profit growth: 19%, Average ROCE: 150%+
Tours and travels – Revenue growth per annum: 11%, Profit growth: 14%, Average ROCE: 30%+
Others (tea, leather chemicals etc) – Revenue growth per annum: -5%, Profit growth: negative, Average ROCE: negative
Overall company – Revenue growth per annum: 11%, Profit growth: 30%+, ROCE: 25%+

A few key points stand out
- The management is moving the company out of the unprofitable lines and investing into profitable businesses. They could move faster, but I still appreciate the performance as they are operating in a PSU environment with unionized labor.
- The management has improved the Return on capital for the good businesses too in the last 5-6 years. For example – logistics, travel etc have seen improvement in capital returns
- The management has paid off all the debt and has surplus cash of almost 300 crs on the balance sheet
- The management has raised dividend rapidly in the last 5 years and the current dividend is almost 4% of the CMP.

I personally think that the management has done a fairly good job of delivering good performance in tough business segments.

A few more points -
- The company has a few JVs (joint ventures) also. One of the JV (TSL) had a fraud and misreported the results for the last few years . As a result Balmer lawrie has prudently written off the investment in the JV. This has depressed the company’s profit for the year.
- The company is investing in the logistics business by opening new CFS. In addition the company has exited most of its unprofitable tea business in UK and hopefully will do so in india too.

The company should be able to make a net profit in the range of 130-140 crores for the year (including JVs). I think a conservative estimate of fair value for the company is around 1300 Rs/ share.

Perception driven investing
There is a lot of perception driven investing in the market. A lot of investors, including me, make decisions based on certain pre-conceived notions. A few of these notions are true, but some are just assumptions which have never been validated.
- PSUs do not make good investments: The assumption is that the PSU label means a poorly run government company which is always losing money. This is however always not true . There are several profitable and well run PSU such as Concor, BHEL etc.
- MNC are attractive investment: The assumption is that the MNC subsidiaries are run by well educated and professional managers. Hence they are good investments. The reality is that these companies are fairly well run, but not for the benefit of the minority shareholders. There have been a lot of instances where the top management has stiffed the minority shareholder to benefit the parent company
- Small and mid caps are risky: All stocks are risky if you don’t know what you are doing. Even walking in the house is risky, if you close your eyes when doing so.
- Rohit is smart, handsome and good looking: This is not a perception, but absolute truth :) even if no one including my wife refuse to agree with it.

Balmer lawrie has suffered from a PSU discount and has always sold below fair value. At the same time it has given 35%+ returns per annum (including dividends) to shareholders who have been diligent enough to evaluate the company beyond the labels and patient to hold on to it for the long term.

I think it is important to check one’s assumptions and perceptions before making a decision. You may be surprised by what you find – that is other than the last point about me, which I can assure you is not a perception but absolute reality :)


Anonymous said...

Nice post again!

Balmer lawrie & co ltd is in my top 3 holdings. Apart from buying during the crash – I added between price of 500-550 also.

From what I have seen till now – I am quit confident that best in this company is yet to come.


Lucky said...

Rohit is smart, handsome and good looking (mail me a photo).

Let me be the first to acknowledge that :-)

Good analysis. Coming from the previous post, this could be one of the companies for which the index could be ignored.

Anonymous said...


Can you please give us some details about how you arrived at the fair value number ?


rayhaan said...

hi rohit,
thanks for another post on the basic concepts of successful investing.
i had a few quetions- u use cash eps while evaluating a company or just eps?
and why?
q.i just saw a few stocks like coastal roadways and waterbase selling at very low free cashlow important is free cash flow while investing? i mean, i find them selling at these ridiculously low valuations( basically wot im trying toask u , is wich one of us is going crazy, me or
q.what are your views on the above stocks?
q.what are ur views on teesta agro ?, i mean this is so looks like a ncav situation , u know, below cash,free cashflow,book value and even a low p/e(after u look at cash eps of course) . of course, there s 1 negative to the story of a preferential allotment taking place and 1 positive development that of their very 1st dividend.
last AND the least important question ,were u by any chance a writer of red herring prospectuses in a past life or are u by any chance,related to geff gannon(u reallly should chek out the podcast!) , i mean u r so tough on ur stock!
eagerly aw8ing ur reply,

Sachin Purohit said...

Hi Rohit,
Nice post on Balmer Lawrie. The comment above from Rayhaan leads me to another one - would like to see some article from you on Cash Flow Statement Analysis.

I know there are a couple of old articles on this blog, related to FCF and maintenance capex. But would be great to have something similar but in case study format.

Rathin Shah said...

Hi Rohit,

One of the key business division is their tours and travel segment. Just wanted to understand what does the company do - are they agents? Where do they sell their services. I haven't seen any ads by the company. Just wondering - whom are they selling their services?


Mohit Rathi said...

Hi Rohit

Dont you think Balmer Lawrie investment would be a better vehicle to invest as it is a dividend passthrough. The share price will go up with Balmer Lawrie and any disinvestment will benefit it.


Rohit Chauhan said...

Hi prashant
yes the company has been doing quite well ..dont know if it will further on it , but they keep the current performance going it would be a investment


Rohit Chauhan said...

my wife sees this blog once in a while ..last thing i want to do is send my photo around :) ..dangerous for my health !!

on a more serious note ..yes this company is attractive even when the index is high ..quite possible it will drop further when the index drops ..who knows


Rohit Chauhan said...

hi vani
i have loaded the computations in the google group ...chk the downloads link. i keep updating the same file with the new results


Rohit Chauhan said...

hi rayhaan
you have asked multiple question ..let me answer a few which can easily

i dont use EPS for valuations as such ..just glance at the PE as quick filter ..if stock is at 20+ PE , then i may not be as enthusiatic

i typically calculate free cash flow ..which is not cash EPS as i am reducing the maintenance capex ..and i use this FCF for arriving at fair value

regarding the companies you mention ..i have not seen any of them cannot really comment as of now ..let me have look

i am not related in any way to jeff ..have heard his podcast ..he is a very good investor..and no i have never written any red herring prospectus

Rohit Chauhan said...

hi sachin
will do so in the future

cash flow is very critical when looking at companies ..i think P&L, Balance sheet and cash flow should all be looked at to get a good view of the company


Rohit Chauhan said...

hi rathin
the tours and travels division caters mainly to
PSU and goverment travel ..i think they are no much in the consumer markets


Rohit Chauhan said...

hi mohit
i dont have any prefence for or against balmer lawrie investments such if the divestment happens the discount may reduce and you may get a upside ..but then who knows when it will happen.

i would rather bet on the company itself and not worry about the discount


Anonymous said...

the liquidity is much less. how can u sell it?????????

Anonymous said...

Hi Rohit,

When I value companies, to simplify my calculation of "value", I just take the Net Income as the current value of the business (FCF). I ignore the CAPEX etc as Buffet says that Depreciation = CAPEX (generally speaking - that's my understanding). I then forecast Net Income for the next 10 years and then use DCF to estimate present value.

Do I miss out anything if I calculate stock purchase price? Your feedback will be highly appreciated.

sujith said...

Hello Rohit

Here is the link for the article

-Planning a target of 3500 crore by four years .

- Tea business is getting a second chance a second chance . Not a good move . Hired a new MD to revive . How much tea business is contributing to their losses kitty (in terms of percent .Do you have any estimate .

-lubricants business in retail locomotive . Already crowded market . think it is cashing on the boom in autos

Ameya S. Kanetkar said...

hello rohit...I would like to know about your valuation of the company...
How come you valued it to rs.1500 crore? Please upload a spreadsheet if possible!