Stock Update:CEBBCO

Salient Points from the Conference Call which was addressed by Ajay Gupta:-

• There is nothing wrong with the operations of the company. No reason for the stock to behave the way it did in the last 2 days.
• Deloitte is our auditor and they have not made any adverse comments about the management ever.
• There are more than 50% non-promoter board members
• Tata Capital has a board member by virtue of their 11% stake in the company. He sits on the management committee and audit committee of the company
• The inter se transfer of shares was requested for because they wanted to create a family trust for tax efficiency. Ajay Gupta and others would transfer their shares to Mr Kailash Gupta and he would then in turn create the trust where all of the promoters would have a stake as before. Because of the many rumours in the market related to this, they have now put this on hold, atleast till Oct 2013 (3 years of listing)
• For the FBV, the company is running at full capacity.
• There is a small delay in capacity expansion - expecting it to be ready in Q4 and available for the full FY14.
• There is no change in the dividend policy of 20% of PAT 

I did not get a feeling that there is something majorly wrong with the company (I may be wrong, but that is the impression I had) . I will wait for a day or two and probably add on some more.

Stock Update: CEBBCO

The last few days for investors in CEBBCO has been traumatic. The stock has literally tanked and is now close to 60 levels. On Friday, it was down nearly 20%. So, overall in a matter of a few weeks, the stock is down nearly 40% (from around 100 levels to 60).

The question in everyone's mind is what should we do now. There are 3 things one can do now -- there are always only these 3 things one can do ;-).
1) Buy more
2) Sell and get out
3) Hold and watch!!

Personally, I am a bit perplexed at the steep 20% fall on Friday. The results that the company announced was reasonable. Net Sales has gone up y-o-y; so has net profit & EPS.

The only negative news that has come out is the pledging of shares by the management. The percentage of shares pledged is fairly low (around 2% of total outstanding shares), so that too should not be a big deal. Unless, insiders know something that we retail investors don't - things like corporate governance issues - there may not be a fundamental case for such a dramatic fall in prices.

So, in this case, I am planning to hold on to my shares - just wait and watch to see further developments. The stock is fairly close to its 52 week low so there may be some buying around these levels (I doubt it though, given he steep fall last week).

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.