Guru Speak: Interview with Bill Ackman

Astral Polyteknik - A Closer Look

Astral Poly Technik Ltd. (Astral) is a pioneer & market leader of CPVC pipes & fittings in India. Astral is a  licensee of Lubrizol, USA, to manufacture & market its world class plumbing products in  India.

GI  pipes were  in  existence  in  domestic  plumbing  industry  but  now  CPVC  pipes  are gaining ground as they don’t corrode over time which is a major concern with the GI pipes. Also, due to lighter weight, it’s easier to transport and install CPVC pipes. CPVC pipes also offer cost benefits as they are 20-25% cheaper than the GI pipes and have a  longer  life span of around 30-35 years compared to around 10-15 years for GI pipes. The strength of these CPVC pipes make them better substitutes of GI pipes for many residential and industrial applications.

Astral has an exclusive license to manufacture Lubrizol’s global top-seller Blazemaster FireSprinkler Systems, based on CPVC platform. The company has also picked up 85% stake in
Advance Adhesives Pvt. Ltd. to produce Cement Solvent (solution for joining pipes) via technology developed by global Adhesives major, IPS, USA. This has a good potential for Astral.

The advantage for Astral is that the raw material is restricted and not easily available. In addition, Lubrizol is in talks with Astral management to setup a joint venture in India. Astral is  aggressively expanding its capacity to meet the robust demand and is expected to more than double to 100,000 TPA by end of FY13 from the current capacity of 48400 TPA.

The company is also spreading its wings in Africa and has opened a manufacturing unit in Nairobi, Kenya.

The  Company  has  reputed  clientele  which  includes  major  construction  houses  like  Hiranandani Construction, Raheja Group, Tata Housing, Nagarjuna Construction, The Oberoi Group, Taj  Group  of  hotels, Le Meridian and  other major  clients  like NTPC,  TISCO,  Reliance  Industries,  Tata  Chemicals  etc.

FINANCIALS

	FY11	FY10	FY09	FY08	FY07
Sales	436.76	304.52	204.99	144.53	104.46
Other Income	4.21	4.24	-4.78	4.68	1.44
Op Profit	53.29	42.01	29.42	20.7	13.39
EBDIT	57.5	46.25	24.64	25.38	14.83
PBT	41.54	33.63	15.85	19.42	10.75
PAT	33.6	28.03	14.19	17.08	9.11
EPS	14.95	24.94	12.63	15.2	8.11
Depreciation	10.72	8.6	6.17	3.26	2.2
Interest	4.59	4.84	5.31	2.69	1.88
Effective Interest Rate(%)	11.27%	11.98%	8.52%	8.39%	7.71%
Tax	7.95	5.57	1.65	2.34	1.65
Effective Tax rate (%)	19.14%	16.56%	10.41%	12.05%	15.35%

Dupont Analysis
OPM(%)	12.20%	13.80%	14.35%	14.32%	12.82%
NPM(%) -- (A)	7.69%	9.20%	6.92%	11.82%	8.72%
Asset turnover(avg) -- (B)	2.30	1.92	1.32	1.29	1.14
RoA(%)	17.73%	17.68%	9.15%	15.26%	9.91%
Financial Leverage -- ( C)	1.27	1.34	1.67	1.40	1.36
RoE(%) -- (=A*B*C)	22.58%	23.73%	15.30%	21.39%	13.48%
RoA(%)	17.73%	17.68%	9.15%	15.26%	9.91%

VALUATION
At the CMP of 198, the stock is trading at a PE of 13.24.

My conservative FY14 expected EPS is about 26. But, it is likely to do reasonably better as the new capacity comes online by FY13-14. If the capacity additions work out as planned, then EPS can be in the range of 30-32.

Expected price is around 330-360 in the next 2-3 years.

This is a stock with excellent long-term prospects and is good for buying.

Note: I am invested in this stock and investors need to do their own due diligence or refer to their investment advisor before making an investment decision.

eClerx - Good Company to watch out for

I have been looking at eClerx for sometime. The first thing to understand is that eclerx is not an IT company, so you cannot compare it with one. It is more of a BPO/KPO company. Let me explain briefly here:-

BPO is more or less synonymous with call-centers nowadays, but they may be involved in other areas like medical transcription, data entry operators, loan processing, claim processing etc.

KPO is higher up the value chain. They do more sophisticated work. Like patent processing, six sigma implemenations, process re-engineering, workflow redesign, market survey/research, data analytics, market intelligence, legal outsourcing and accounting.

The kind of people employed in these types of organizations are also different, as you can probably understand from the nature of work.

eClerx is somewhere in between the BPO-KPO continuum today and trying to move towards KPO. It is essentially a easy business and the only moat you have is your brand name and client list. eClerx is perhaps the only large listed KPO player in India. The others are Genpact & WNS. Margins are good and better than lower-end BPO business. Business is not as fickle or cost sensitive as pure call-centers. And the opportunity size is HUGE. For example, in US, every large law firm has 100s of para-legals or law clerks, people who are employed to look up references of past cases and provide supporting documents for an ongoing case. Now, that person need not sit in the US and the work can be done from India at maybe 1/5th the cost. This is just an example. same goes for technical analysis in equity markets.

The company has good numbers, good growth, good dividend payout. If they get their act together and can scale up, it can be a 25,000-50,000 cr company in 10-15 years from the current 2100 odd crores.

They have large clients but their top 5 concentration is pretty large, somewhere close to 85% for top 5 clients. For the IT/BPO industry that is very high risk. Companies like Patni actually got into trouble due to their over-reliance on a single customer. Here eClerx is a relatively new company so I think it would need some time to get more customers. This is one area of major risk. however, the management realizes this and is working to add new customers. Five new clients were added in this quarter. Total number of active clients
has increased to 50 currently.

FINANCIALS

	FY11	FY10	FY09	FY08	FY07
Sales	341.91	257.02	197.09	116.98	79.54
Other Income	-5.13	-10.59	-4.23	6.48	5.79
Op Profit	148.8	98.79	79.04	47.75	37.9
EBDIT	143.67	88.2	74.81	54.23	43.89
PBT	134.77	81.35	67.54	49.53	39.86
PAT	118.56	72.59	60.64	43.91	39.67
EPS	41.09	38.14	32.04	23.27	391.83
Depreciation	8.9	6.85	7.23	4.44	3.21
Interest	0	0	0.04	0.26	0.62
Effective Interest Rate(%)	0.00%	0.00%	0.00%	0.00%	0.00%
Tax	16.21	8.76	6.91	5.62	0.27
Effective Tax rate (%)	12.03%	10.77%	10.23%	11.35%	0.68%
Dividend Yield	3.06%	2.38%	1.70%	1.15%	27.17%

Dupont Analysis
OPM(%)	43.52%	38.44%	40.10%	40.82%	47.65%
NPM(%) -- (A)	34.68%	28.24%	30.77%	37.54%	49.87%
Asset turnover(avg) -- (B)	1.46	1.29	1.19	0.86	2.71
RoA(%)	50.69%	36.38%	36.70%	32.22%	135.16%
Financial Leverage -- ( C)	1.00	1.00	1.00	1.00	1.00
RoE(%) -- (=A*B*C)	50.69%	36.38%	36.70%	32.22%	135.16%
RoA(%)	50.69%	36.38%	36.70%	32.22%	135.16%
RoCE(%)	68.27%	45.99%	47.65%	40.63%	150.44%

VALUATIONS
I have used PE ratio for valuing eClerx.

So, expecting Rs 49.3 as FY12 EPS and a PE band of 16 - 22, FY12 (Mar 2012) valuation is likely to be about Rs. 790 - 1090.

Similarly, with Rs. 59.17 as FY13 EPS and a PE band of 16 - 22, FY12 (Mar 2013) valuation is likely to be about Rs. 950 - 1300.

CONCLUSION
This is a good company but looks more or less fully valued at this time. Keep this in your watch list and accumulate for the long term whenever you find the market giving you an opportunity to buy it cheap.