Balaji Amines - Takeaways from their quarterly conference call

Balaji Amines had a conference call on July 28, 2011.

Here are the key takeaways from it:-

1. Methyl Amine capacity is getting increased from 24,000 to 54,000 tons
2. Production of dimethylformide is to start by end of 2013. Total capacity planned is 30,000 tons. Currently, only RCF manufactures this in India and has a capacity of 5,000 tons. India imports the rest of the demand of around 30,000 tons. After Balaji's capacity comes online, India may be in a position to meet all of its needs domestically with some export opportunities as well.
3. The expected revenue from both these initiatives from a 3-year timeframe (2014-15) is about 350 cr. 180 cr is expected from the methyl amine expansion and another 170 cr from  dimethylformide.
4. The company has filed for European DMF for PVP K30. It will take about 6-8 months to get approval. Once approved, the company will be able to export PVP K30 to Europe.
5. The interest costs have gone up dramatically from 9-10% to 13.5-14% currently. This has resulted in high interests costs this quarter and is likely to remain like this for the next few quarters.
6. Prices of key raw materials have also increased after accidents in BASF and Nan Ya Plastics, two large global suppliers.
7. The company has a capex plan of 70 cr out of which 50 cr is for the methyl amine expansion and 20 cr for setting up dimethyl formide production.
8. Company has a working capital loan of about 80-85 cr and total loan book of 157 cr.
9. The newly added capacities are working at 40-50% of capacity currently.
10. The company is targeting a topline of 420-450 cr in FY12
11. The company is targeting a PBT of 47-48 cr in FY12
12. The promoter holds 54% of the company's stock and another 20% is held by close relatives. 20% of promoter holding is pledged to banks to get beneficial terms for the term loans.

Results Update Q1 2011 - JK Lakshmi Cement

	Q1 2010	Q1 2011	% Growth
Sales	323.59	391.79	21.08%
Op Profit	34.62	54.47	57.34%
Net Profit	16.81	22.75	35.34%
EPS	1.37	1.86	35.77%
Cash EPS	3.05	4.76	56.07%
Op Margin	10.70%	13.90%
Net Margin%	5.19%	5.81%

• Margins have increased
• Good overall growth
• Interest expenses have doubled and may go up higher in the next few quarters

Results Update - Shriram Transport Finance

Good set of numbers from STFC. Profit growth has been better than my expectation. But continuous rise in interest rates is surely going to have a more serious impact in the coming quarters.

	Q1 2010	Q1 2011	% Growth
Sales	1233.51	1393.22	12.95%
Op Profit	948.29	1039.49	9.62%
Net Profit	288.94	347.3	20.20%
EPS	12.76	15.34	20.22%

Results Update - Supreme Industries, Balaji Amines

Supreme Industries (Consolidated):

	Q4 2010	Q4 2011	% Growth	FY 2010	FY 2011	% Growth
Sales	669.98	732.52	9.33%	2007.02	2436.2	21.38%
Op Profit	100.82	113.94	13.01%	298.68	357.39	19.66%
Net Profit	51.91	60.25	16.07%	155.98	195.84	25.55%
EPS	4.09	4.74	15.89%	12.28	15.42	25.57%
Cash EPS	5.28	6.01	13.83%	16.45	20.29	23.34%
Op Margin	15.05%	15.55%		14.88%	14.67%
Net Margin%	7.75%	8.23%		7.77%	8.04%
RoCE%	7.47%	8.70%		21.95%	26.35%
RoE%	9.48%	11.00%		28.48%	35.76%
Assets	1138.48
Net worth	547.71
Loaned Funds	511.24

• Dividend of Rs 3 per share has been declared.
• No news on the real estate sale. 
• Q4 growth has been muted, although annual results are reasonably good.
• Net margins have been consistently been increasing last few years. Stands at 8.04% vs 7.77% last year and has actually doubled in the last 5 years from 4% in 2006.

Balaji Amines

	Q1 2010	Q1 2011	% Growth
Sales	78.91	114.52	45.13%
Op Profit	12.03	15.04	25.02%
Net Profit	6.22	7.17	15.27%
EPS	1.92	2.21	15.10%

• Interest outgo has nearly than doubled - from 2.65 cr to 4.95 cr

GEI Industrial Systems - Q2 results update

Good set of results from GEI Ind. The growth momentum continues.

	Jun-11	Jun-10	Growth
Sales	626	503.3	24.38%
NP	47.74	43.34	10.15%
EPS (Basic)	2.87	2.61	9.96%
EPS (Diluted)	2.49	2.61	-4.60%

Pledging of promoter shareholding has reduced from 45.03% to 37.77% of promoter holding.

Margins have reduced due to rise in raw material costs & higher interest rates. 

Portfolio Construction: What is the maximum percentage that a single stock should be within the portfolio?

After having answered the first question on portfolio construction (read about it here), the next question that came to me was about the maximum percentage that a single stock should constitute in one's portfolio. Again, there is no "rule" which prevents you from having your 90% of your equity networth invested in one stock. But like the decision to diversify, here also, I personally comfortable to invest up to 25% in one stock. But that would be really rare. I have to be very very convinced of the story and the fact that my downside is limited for me to go to that extent.

I had in two occasions invested close to 25% in one stock. One was in Tata Motors at 100-110 levels. I sold it off around the 980-990 levels after it had failed to break the Rs 1000 barrier and I got frustrated holding on to it :-)

The second instance was Supreme Industries. I had invested around the 40-45 levels (split adjusted). The downside was limited by their real estate value of their Andheri complex. It has since moved to 200+ levels. Although, I have not yet sold my positions in Supreme, the portfolio weightage has reduced because I have added other stocks.

In general, I prefer to have somewhere close to 5%-10% invested in one stock. I typically increase or decrease the position based on market price and my conviction level.

Sintex Ind - Results Update

Good set of results from Sintex. The growth momentum continues.

Consolidate Net Sales is up from 930.9 cr to 1128.8 cr (up 21.3%)
Net Profit is up from 78.8 cr to 94.6 cr (up 20.1%)
EPS up from 2.91 to 3.49 (up 19.9%)

Monolithic segment order book at Rs 3000 cr after Q1 execution.

Category	Q1 FY11 (cr)	Q1 FY12 (cr)	Growth (%)	Remarks
Building Material	358.4	473.2	33.5%	Company adding execution capability in Bihar Private sector orders flowing in, reducing the dependency on the government projects for Pre-fabs
Custom Moulding	450.7	523.9	16.2%	Pursuing growth opportunities at 12-15 new companies
Textile	98.3	109.3	11.2%

Negative
The pledging of promoter holding has gone up from 29.6% (Q1 FY11) to 38.14% (Q1 FY12).

[Guest Post] Capital Allocation in a Portfolio

This post is from Prabhakar Kudva (http://investment-in-sight.blogspot.com). 

Capital allocation is probably one of the most important aspects of investing. Every time I need to decide how much capital to allocate to a particular company i use the following steps:

Step 0: Identify the companies whose business dynamics you understand reasonably well - either because its inherently a simple business and/or because you've spent time and energy to understand what factors affect a particular business' performance. This is basically your universe of companies.

Step 1: Predict the approximate EPS (a range,may be) one year down the line.If you are unable to predict the EPS with a reasonable degree of accuracy then it means two things:
a) This is a complex business where profits depend on a number of totally unpredictable factors.Its better to remove such companies from your universe/sample space.
b) You don't understand the business well enough.Read more about the business.Do some scuttlebutt.This is a learner's game.If you spend time understanding simple businesses, their sources of profit and external factors that affect business, eventually you'll be able to estimate the one year forward EPS with a reasonable degree of success.

Step 2: See if there is a possibility of a PE re-rating. Or will the PE remain the same. Or may be the PE will be de-rated? Estimate what the PE might be based on your projections in Step 1.Remember to be conservative.In most cases assume PE will remain the same or there'll be a slight re-rating(if expected profit growth in step 1 is out of the ordinary).If you think there's going to be a de-rating you know what to do.

Step 3: Now you have an approximate PE and an approximate EPS range. Arrive at your target price.

Step 4: Now based on the CMP and target price - check what the expected return is.

Step 5: Repeat steps 1 to 5 for all companies in your universe (step 0). Compare the expected returns arrived in step 4. For example if you have three companies A,B,C and the return expectations are 40%,25% and 10% respectively you should invest:
a. 40/(40+25+10) = 54% in company A
b. 25/(40+25+10) = 33% in company B
c. 10/(40+25+10) = 13% in company C

Assumptions
a. Ofcourse this is not exact science.Every year that you repeat this exercise,learn from your mistakes, learn new things about your business you'll get better at predicting the EPS of the businesses you understand and hence better at capital allocation.
b. I use just one year because I feel predicting more than one year ahead for ANY business is futile. The business environment and the capital market that we operate in is way too dynamic to talk about the 'really long term'.So we take one year at a time.

Portfolio Construction: How many stocks should I have in my portfolio?

The first question that I had was on the number of stocks I should be holding in my portfolio. Typically, investors are mostly over-diversified. Some, on the other hand, in trying to be contrarions, hold very few stocks. Both have their merits and demerits. Having an over-diversified portfolio dilutes the overall returns whereas a highly concentrated portfolio increases downside risk.

So, why do we need to diversify in the first place? We all know that all great wealth was created by concentrated holdings. Bill Gates has his whole networth in Microsoft. Ditto Dhirubhai Ambani. So, why not do the same thing? Well, the issue here is that we are not insiders or promoters of the companies we own stocks in. We don't have a handle on how the company is being run and don't "really" know the inner details that is required to have a great level of conviction.

There is also another factor. Although, concentration (in the right company) can bring huge rewards, it can also destroy great wealth. Think of the Modis and the Bangurs of India. They would probably have done better if they diversified their wealth in other ventures (maybe invested in the Reliance IPO!!!) than put all their money in their own companies.

So, diversification is important from a wealth-preservation perspective. And also because our level of conviction of a company's performance is never 100%. There are risks involved in investing. There are various types of risk involved, main ones being:-

• Individual business risk - the conpanu you invest in goes bankrupt (Enron, Satyam etc)
• Sector/industry risk - the industry declines (VCR, Walkman, Pager etc)
• Market risk - the stock market crashes (1929 US, 2008 Worldwide)
• Personal risk - you need money urgently for some unforeseen expenses

Equity diversification, actually mitigates the first two risks. It cannot really do anything about the last two. For those, you need to have a proper asset allocation in place. That is a topic for another post.

So, how much is enough. Charlie Munger, one of my gurus, had at one time only four stocks in his portfolio and was very comfortable with them. Others have somewhere between 10-25. Peter Lynch, also one my gurus, on the other hand had more than 1200 stocks in his Magellan fund!! But all of them, and other great investors, have said that having a portfolio of between 10-20 stocks is optimum for an individual investor. I prefer to have about 10 stocks in my core portfolio. And some more where I am either building up my positions or dwindling down. So, I personally try to stick to the 10-15 stock range. That is more so, because, I have seen beyond that I am not able to track the news flow in the companies I am invested in.

Another reason I try to stick to the range is that if I already have say 15 stocks and I get a great new idea, I would be forced to think about which one to replace. This, sort of, helps in moving out holdings where my conviction is lower than the new idea that I have.

Questions on constructing a portfolio

When I first seriously thought about building an investment portfolio, I had a lot of questions that came to my mind. What I wanted was to build a portfolio that would help me build a sizable capital over a period of time. The plan was that I would add to the portfolio periodically and build up positions. The time-frame that I had (and still have) was around 15 years.

The questions at the top of my mind were:

1. How many stocks should the portfolio hold?
2. What is the maximum percentage that a single stock should be within the portfolio? 
3. When should I sell? Should I have target prices?
4. How much cash should be there in the portfolio?
5. Should I have stop losses?

I though that answering these questions were very important to be prepared for building a log term portfolio. I will try to take you through my thoughts on each of these questions on subsequent posts.