Stock Idea: CEBBCO

CEBBCO looks to be a good medium-term (2-3 years) growth story. Details below.

1	Describe the business in a few sentences. What does the company do? Who are its primary customers?
	CEBBCO is a commercial vehicle “body-builder”!! It is the largest player in the Fully Built Vehicles and manufactures Fully Built Vehicles, Wagons, EMU’s, Refurbishment and Components for Railways, Structurals for Electrostatic Precipitators (ESP) and Boilers for power plants. Tata Motors makes up for 53% of its revenues. Other than Tata Motors, Ashok Leyland, Eicher Motors, Man Force Motors, Indian Railways, Defence Factory Jabalpur, L&T and BHEL are major clients.
2	Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?
	1. Projected FBV industry growth from about Rs 1100 cr in 2011-12 to Rs 8000 cr by 2016-17 - a 6.5x growth. 2. The stated policy of the OEM’s is to convert to 100% FBV by 2017. 3. Bank finance for truck bodies and quality assurance from the OEMs are key demand triggers for truck buyers to shift towards FBVs from buying truck chassis. 4. Within medium and heavy CVs, heavier truck sales are gaining momentum which should also aid a shift towards FBVs since OEM-fitted FBVs are better designed. 5. The Government, in an effort to encourage FBV sales, has placed a 2% excise duty differential for buyers who buy FBV as against chassis.
3	What is the current market share of the company? Can the market share be increased?
	CEBBCO has about 30%-35% of the organized market. CEBBCO is one of the preferred vendors for most of the OEMs and is looking to increase market share to 40%. Beyond that it will be very difficult. The business does not seem to have any sustainable competitive advantage (moat) and has low entry barriers. Number of companies in the unorganized sector is fairly large.
4	Who are the primary competitors? Why is this company a better investment than them?
	Competition from the organized segment remains limited and includes players like multinational Hyva and local player Utkal.
5	What is the owners’ and managements’ stake in the company?
	Management own 55% of the stock.
6	Are management's salaries too high?
	Father-son duo together earn 2.1 cr on a PAT of 40.8 cr implying 5.25%. This seems to be on the higher side, especially considering that they own 43% of the stock between the two of them.

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1	How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?
	D/E is 0.43. Debt has gone up along with equity and reserves.
2	Is the debt level normal for the sector the company is operating in (i.e. how much is the debt-equity ratio of its nearest competitors)?
	Debt level is not excessive so not much of a concern here.
3	How much cash is there on the BS? What is the cash per share?
	Cash & Investments are negligible.
4	Is the Networth rising over the years?
	Networth has increased significantly. From 50.17 cr in 2008 to 258.09 cr in 2012.
7	Has the company increased its sale, net profit, operating margins and net margins over the years?
	Compounded Sales Growth 5 Years: 34.01% 3 Years: 22.05% 1 Year:   116% Compounded Profit Growth 5 Years: 18.01% 3 Years: -1.54% 1 Year: 617%
8	Has the company increased it RoE, RoCE, (RoA for financial companies) over the years or atleast maintained it? How does it compare to its competitors?
	FY12 FY11 FY10 RoCE (%) 17.91 6.27 29.33 RoNW(%) 15.80 2.62 28.52 FY11 was a difficult year with multiple problems. The company has a checkered history of PAT growth.
10	Is the company operating cashflow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?
	Net Cashflow (Operating – Investing) is constantly negative for the last 3 years.
11	Does the company pay tax, dividends every year?
	The company has been a regular tax player. It will be paying its maiden dividend this year.
12	Is the Free Cash Flow per share higher than dividends paid?
	Company is negative cash flow for the last 3 years
13	Is the business capital intensive?
	RoA is close to 46% thus it is not very capital intensive.

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1	What is the expected valuation?
	I am expecting a EPS growth of 30%+ for the next 2-3 years. With that an EPS of 12-13 is possible by FY14. A PE ratio of 15 can drive the price to 180.
2	Is the PE ratio below 15? Is the PEG above 1.0?
	PE is currently 10.52 (CMP=100)
3	Why do you think the stock is under priced? Is there an expectation to double the investment in 2-3 year timeframe? If not, why bother?
	Growth is expected to be very strong in the next 3-4 years.

Disclosure: I am interested in CEBBCO and my views are likely to be biased. Please do your own due diligence before investing.