About
Shakti Met Dor is a leading manufacturer of steel doors since 1995. The company was established primarily to manufacture steel doors, windows, and other building material products to cater to the construction industry. Shakti has expanded its facility to 180,000 Sq.ft of manufacturing and warehouse space capable of producing 300,000 doors and frames. Shakti has seven sales and marketing branches across the major metropolitan cities in India.
Financials
The company is in a niche business and has done fairly well in the last 8-10 years. The ROE has been maintained in excess of 20% with the recent drop due to new CAPEX and higher receivables. The Debt levels have gone up due to the new capacity and due to high additions to accounts receivables in the current year.
The inventory turns has remained at around 10 turns per year and the working capital turns in range of 3.5-4 which seems the reasonable. The total asset turns are at 2.3 which is likely to improve to around 3 with the capex being completed in the last one year.
The one key area of concern is the increase in accounts receivables which is now at around 150 days. I think this needs to be watched closely over the next few years.
Positives
The company operates in a profitable niche and has been able to scale up well in the last few years. The company has been able to deliver a topline growth in excess 20% in the last 10 years and bottom line growth (inspite of the recent drop) in roughly the same range.
The company has recently completed its capex cycle and with the growth in the construction, IT and other user industries, should be able to grow well. In addition the profit margins are likely to improve in the next few years, if the company is able to reduce the debt load and control the raw material costs. The improvement is not a given, but based on the past performance likely to happen.
Risks
There are several key risks in the business. The number one risk is the delisting plan of the company (see here). The management plans to delist the company and has offered around 195/ share. The management holds 56% of the company and needs 34% more to delist. Around 100 shareholders (including the promoters) hold around 90% of the company. I do not have details of these shareholders, but if the management has an informal agreement with them, then the delisting may happen at the proposed price. The minority shareholders holding 10% of the stock will not matter much in the reverse book building process.
A consent order was passed by SEBI on non-compliance of the company of the Substantial Acquisition of Shares and Takeovers Regulations in June 2010. It seems the promoters were acquiring the shares from the market since 1998 and have not disclosed it. This information is missing from the annual reports till 2008-2009. I think this does not inspire confidence
The other risk is the increase in the accounts receivables. This may not be as much as risk as the last quarter of 2010 has seen a sudden increase in topline and hence the year end numbers could be inflated due to that. However one has to watch this number closely as the debt more than 6 months doubled in 2009 and the total debt has increased further in 2010. This increases the risk of bad debt write-offs in the future.
Management quality checklist
- Management compensation: On the higher side. Management compensation is around 12% of net profit
- Capital allocation record: Has been sensible and good till date.
- Shareholder communication – Not good. The management has not been transparent in their communication (see the point on risks above)
- Accounting practice – Seems fine for most part with all the mandatory disclosures in the latest AR.
- Conflict of interest – None in the notes to account. However see the risks section for such incidents.
- Performance track record – Good from a business performance perspective. Corporate governance standards have not been satisfactory.
Conclusion
I started this analysis a few days back and was impressed with the fundamentals. On looking through the BSE filing, I noticed the delisting notice from the company and was thinking of this as an arbitrage or long term opportunity. However the nature of the shareholding (thanks to ninad for pointing that out), I have concerns on how the delisting will work out for the minority shareholder. In addition, some of the past actions do not inspire confidence.
As I discussed in the last post, my valuation template has a checklist which I go through before doing a more detailed analysis on the company. On running through the checklist, I have come across the risks mentioned earlier in this post. I am not too comfortable with those risks and hence inspite of good fundamentals have decided to drop this idea.
Note: If you hold the stock and don’t think the above issues are material enough, it may be so. However I am more conservative and don’t want to put my money on the line to test it out.
July 22, 2010
July 18, 2010
What’s on my mind – Jul 2010?
Update - Mon 19th
I have been thinking of the paid service for sometime and thought of testing the waters by sneaking it in the post yesterday. I had expected a few responses at best considering the fact that I have never disclosed my returns openly and have rarely given any hot tips which can double overnight.
I have received way more emails than expected and will have to plan the next steps accordingly. I may not be able to respond immediately to the 100+ emails personally. I am still thinking of the next steps and will put up posts about the service in the coming months. I am sure some of you, who have expressed interest, will be able to make a better decision after getting more details.
Thanks to all of you who have written to me personally expressing interest in the service.
No easy money
The index seems to have stagnated at 17500-18000 levels and so it would appear that the market has gone nowhere in the last 6 months. However if you look beneath the surface, a lot of midcap and small cap stocks have done extremely well in the last six month. A lot of these stocks are now at an all time high and have even crossed the Jan 2008 peak.
In the years before 2008, there was always a pocket or sector which was undervalued. Pharma and IT were cheap in 2007 and then almost everything was cheap in 2008 and early 2009. No such luck now!
I have looked at scores of companies in the last few months and have found most of them to be fairly valued or undervalued by a small margin.
Nothing to buy?
If the above sounds to be a pessimistic situation, it is not so in the real sense. True, there are not too many cheap and easy stocks to pick. At the same time it does not mean that there are no undervalued stocks at all. It just means that it will require more time and effort to find that attractive idea which will make you good money.
No multi-baggers
I don’t think one can expect to find multi-baggers easily. At current valuations, if the underlying business does well, then the stock may give high returns in the next few years. However the days of 2-3X returns in a year are gone.
All this means, that one should now have diminished expectations going forward. In addition, it will require quite a bit of effort to get above average returns. I personally think that getting 20% return per annum over the next 3 years will be quite a stretch (though I would not mind being proven wrong on the upside on this)
What am I upto?
I have been making small changes to my stock evaluation process. I have not made any drastic changes, but tried to deepen the analysis and make it more detailed and comprehensive. Some of the changes are
Analyze 10 yrs of history for a company - A 5 year history is less for most companies and may hide the performance of a company over a full business cycle. As a result I have now started evaluating each idea for a minimum of 10 years. If the company does not have 8-10 yrs of operating history, I give the company a pass
Detailed sensitivity/ scenario analysis – I have now started calculating the fair value of each company with varying assumptions of profit margins and growth. That gives a better idea of the fair value of the company under varying economic conditions.
Detailed checklist – I have recently finished the book – The checklist manifesto by atul gawande (I cannot recommend this book enough). This book has increased my appreciation for investing checklists and I have been working on making my own checklist more comprehensive and robust.
The net result of the above changes and more is that it now takes me 12-15 hrs of work to analyze a small company and 20+ hours to evaluate a complex one. The process is now more time consuming, but definitely more robust.
You can find the template here
I am also working on launching a paid service over the next couple of months. My plan is to launch a paid subscription service to an actively managed portfolio. This service is most likely to feature a model portfolio (almost mirroring my own portfolio) with clear buy and sell recommendations. In addition, I will also be adding a tracking list of attractive idea which may not be a part of the model portfolio, but may move into it if the price is right. In addition,
I would provide detailed analysis behind each idea in the model portfolio and the tracking list.
Please drop me an email at rohitc99@indiatimes.com if you think you would be interested in such a service. I am working out the details, cost (which will be reasonable) and admin details for the service. I am likely to start the service in a beta mode, with around 10 subscribers. You can expect to hear more details on this in future posts.
I have been thinking of the paid service for sometime and thought of testing the waters by sneaking it in the post yesterday. I had expected a few responses at best considering the fact that I have never disclosed my returns openly and have rarely given any hot tips which can double overnight.
I have received way more emails than expected and will have to plan the next steps accordingly. I may not be able to respond immediately to the 100+ emails personally. I am still thinking of the next steps and will put up posts about the service in the coming months. I am sure some of you, who have expressed interest, will be able to make a better decision after getting more details.
Thanks to all of you who have written to me personally expressing interest in the service.
No easy money
The index seems to have stagnated at 17500-18000 levels and so it would appear that the market has gone nowhere in the last 6 months. However if you look beneath the surface, a lot of midcap and small cap stocks have done extremely well in the last six month. A lot of these stocks are now at an all time high and have even crossed the Jan 2008 peak.
In the years before 2008, there was always a pocket or sector which was undervalued. Pharma and IT were cheap in 2007 and then almost everything was cheap in 2008 and early 2009. No such luck now!
I have looked at scores of companies in the last few months and have found most of them to be fairly valued or undervalued by a small margin.
Nothing to buy?
If the above sounds to be a pessimistic situation, it is not so in the real sense. True, there are not too many cheap and easy stocks to pick. At the same time it does not mean that there are no undervalued stocks at all. It just means that it will require more time and effort to find that attractive idea which will make you good money.
No multi-baggers
I don’t think one can expect to find multi-baggers easily. At current valuations, if the underlying business does well, then the stock may give high returns in the next few years. However the days of 2-3X returns in a year are gone.
All this means, that one should now have diminished expectations going forward. In addition, it will require quite a bit of effort to get above average returns. I personally think that getting 20% return per annum over the next 3 years will be quite a stretch (though I would not mind being proven wrong on the upside on this)
What am I upto?
I have been making small changes to my stock evaluation process. I have not made any drastic changes, but tried to deepen the analysis and make it more detailed and comprehensive. Some of the changes are
Analyze 10 yrs of history for a company - A 5 year history is less for most companies and may hide the performance of a company over a full business cycle. As a result I have now started evaluating each idea for a minimum of 10 years. If the company does not have 8-10 yrs of operating history, I give the company a pass
Detailed sensitivity/ scenario analysis – I have now started calculating the fair value of each company with varying assumptions of profit margins and growth. That gives a better idea of the fair value of the company under varying economic conditions.
Detailed checklist – I have recently finished the book – The checklist manifesto by atul gawande (I cannot recommend this book enough). This book has increased my appreciation for investing checklists and I have been working on making my own checklist more comprehensive and robust.
The net result of the above changes and more is that it now takes me 12-15 hrs of work to analyze a small company and 20+ hours to evaluate a complex one. The process is now more time consuming, but definitely more robust.
You can find the template here
I am also working on launching a paid service over the next couple of months. My plan is to launch a paid subscription service to an actively managed portfolio. This service is most likely to feature a model portfolio (almost mirroring my own portfolio) with clear buy and sell recommendations. In addition, I will also be adding a tracking list of attractive idea which may not be a part of the model portfolio, but may move into it if the price is right. In addition,
I would provide detailed analysis behind each idea in the model portfolio and the tracking list.
Please drop me an email at rohitc99@indiatimes.com if you think you would be interested in such a service. I am working out the details, cost (which will be reasonable) and admin details for the service. I am likely to start the service in a beta mode, with around 10 subscribers. You can expect to hear more details on this in future posts.
July 7, 2010
Analysis - Mayur uniquoters
About
Mayur uniquoters is in the business of manufacturing synthetic leather. The company’s products find usage in the footwear, automotive, apparel and sports goods industry.
The company supplies to the major automotive companies in the country and abroad. The company has Ford, GM, and Chrysler as customers in the export market and maruti, Tata motors, Hero Honda and other local players as domestic customers. In addition the company is also a supplier to the replacement market.
Financials
The company has performed quite well in the last 8-10 years. The topline has grown by 20% and net profits by 25% in the last 8 years. The current year profits are a cyclically high due to lower raw material costs and exchange related gains.
The company has consistently maintained an ROE of 15%+ and has reduced its debt to 0. The company now has excess of cash of almost 15 crs on its balance sheet.
The current net margins of the company are around 9% which as stated earlier are higher than normal. The normalized profit margins can be assumed to be between 6-7%.
Positives
The company has been doing fairly well in the last few years. The company has been expanding in the export markets and is now an approved supplier to several international OEMs such ford, GM etc. The company has managed to grow inspite of the recession in the export markets.
The company is also a debt free company and can fund the required capex from the cash on the books.
Risks
The company as an OEM supplier is bound to face continued and relentless price pressure from its customers. In addition, the raw material component is around 75% of the sale price and hence the margins of the company are very sensitive to the raw material prices.
The industry is very competitive and it is unlikely that any participant in the industry can earn large profits in the long run. A ROC (return on capital) of 15% would be a good return for an efficiently managed company.
The no.1 risk is not the business, but the management’s intentions. The management awarded themselves around 800000 (around 15% of equity) warrants in 2007-2008 and exercised those warrants at market price. I consider this as a big negative.
As I have stated in the past – warrants are not free and have a value in itself. In addition, the company did not seem to be in need of capital at that time. The sole purpose of issuing the warrants seemed to be to increase the holding of the promoters (which now stands at almost 75%)
Competitive analysis
The product is characterized by minimal brand value for the end customer. The customers (automotives, apparels etc) however value quality and a reliable supplier for the synthetic leather going into their own products. As a result the brand value exists in the mind of the OEM (original equipment manufacturer) buyer.
The industry is characterized by a large number of smaller players in the unorganized sector of the market. The industry is highly competitive with thin margins and poor quality among the smaller players.
The larger companies like Mayur have an opportunity to establish themselves as reliable suppliers to the OEMs and benefit from the economies of scale at the same time.
Management quality checklist
- Management compensation: the management compensation does not appear to be high. The management (who are also the promoters) is paid around 5% of the net profits (around 80 lacs) which although not low, is reasonable.
- Capital allocation record: the capital allocation record seems to be decent. The management has paid down debt, raised dividend over time and now has cash to re-invest in the business. It will be interesting to see how the management will deploy the surplus cash in the future.
- Shareholder communication: disclosure seems to be adequate and in line with other companies.
- Accounting practice: could not see anything out of the ordinary. I need to dig deeper to find if there is anything to be concerned about
- Conflict of interest: other than the warrants, I could not see any related party transactions of concern.
- Performance track record: fairly good so far
Valuation
The company can be assumed to have a normalized profit margin of around 6-7%. As a result the net profit is in the range of 12-13 crs on a normalized basis. As the industry is highly competitive, it is difficult to assume an extended period of high returns for the DCF calculation.
A back of envelope calculation (assuming PE of 12-13) gives a fair value of 150 crs.
Conclusion
The current price is 50% of the fair value. The crucial point is not at arriving at a fair value number, but figuring out the economics and future profitability of the business. If the current numbers can be maintained, then the stock is a bargain.
The other major concern I have is the management attitude towards the minority shareholders. The warrant issue does not inspire confidence and has left a concern in my mind.
I am still halfway through my analysis and will make up my mind after I dig deeper into the company
Disclosure: I have a starter position in the company. A gain on my current position will not pay for than a nice dinner. Please make your investment decisions independently.
Mayur uniquoters is in the business of manufacturing synthetic leather. The company’s products find usage in the footwear, automotive, apparel and sports goods industry.
The company supplies to the major automotive companies in the country and abroad. The company has Ford, GM, and Chrysler as customers in the export market and maruti, Tata motors, Hero Honda and other local players as domestic customers. In addition the company is also a supplier to the replacement market.
Financials
The company has performed quite well in the last 8-10 years. The topline has grown by 20% and net profits by 25% in the last 8 years. The current year profits are a cyclically high due to lower raw material costs and exchange related gains.
The company has consistently maintained an ROE of 15%+ and has reduced its debt to 0. The company now has excess of cash of almost 15 crs on its balance sheet.
The current net margins of the company are around 9% which as stated earlier are higher than normal. The normalized profit margins can be assumed to be between 6-7%.
Positives
The company has been doing fairly well in the last few years. The company has been expanding in the export markets and is now an approved supplier to several international OEMs such ford, GM etc. The company has managed to grow inspite of the recession in the export markets.
The company is also a debt free company and can fund the required capex from the cash on the books.
Risks
The company as an OEM supplier is bound to face continued and relentless price pressure from its customers. In addition, the raw material component is around 75% of the sale price and hence the margins of the company are very sensitive to the raw material prices.
The industry is very competitive and it is unlikely that any participant in the industry can earn large profits in the long run. A ROC (return on capital) of 15% would be a good return for an efficiently managed company.
The no.1 risk is not the business, but the management’s intentions. The management awarded themselves around 800000 (around 15% of equity) warrants in 2007-2008 and exercised those warrants at market price. I consider this as a big negative.
As I have stated in the past – warrants are not free and have a value in itself. In addition, the company did not seem to be in need of capital at that time. The sole purpose of issuing the warrants seemed to be to increase the holding of the promoters (which now stands at almost 75%)
Competitive analysis
The product is characterized by minimal brand value for the end customer. The customers (automotives, apparels etc) however value quality and a reliable supplier for the synthetic leather going into their own products. As a result the brand value exists in the mind of the OEM (original equipment manufacturer) buyer.
The industry is characterized by a large number of smaller players in the unorganized sector of the market. The industry is highly competitive with thin margins and poor quality among the smaller players.
The larger companies like Mayur have an opportunity to establish themselves as reliable suppliers to the OEMs and benefit from the economies of scale at the same time.
Management quality checklist
- Management compensation: the management compensation does not appear to be high. The management (who are also the promoters) is paid around 5% of the net profits (around 80 lacs) which although not low, is reasonable.
- Capital allocation record: the capital allocation record seems to be decent. The management has paid down debt, raised dividend over time and now has cash to re-invest in the business. It will be interesting to see how the management will deploy the surplus cash in the future.
- Shareholder communication: disclosure seems to be adequate and in line with other companies.
- Accounting practice: could not see anything out of the ordinary. I need to dig deeper to find if there is anything to be concerned about
- Conflict of interest: other than the warrants, I could not see any related party transactions of concern.
- Performance track record: fairly good so far
Valuation
The company can be assumed to have a normalized profit margin of around 6-7%. As a result the net profit is in the range of 12-13 crs on a normalized basis. As the industry is highly competitive, it is difficult to assume an extended period of high returns for the DCF calculation.
A back of envelope calculation (assuming PE of 12-13) gives a fair value of 150 crs.
Conclusion
The current price is 50% of the fair value. The crucial point is not at arriving at a fair value number, but figuring out the economics and future profitability of the business. If the current numbers can be maintained, then the stock is a bargain.
The other major concern I have is the management attitude towards the minority shareholders. The warrant issue does not inspire confidence and has left a concern in my mind.
I am still halfway through my analysis and will make up my mind after I dig deeper into the company
Disclosure: I have a starter position in the company. A gain on my current position will not pay for than a nice dinner. Please make your investment decisions independently.
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