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Monday 1 October 2012

Stock Pick: Amara Raja Batteries (ARBL)

Describe the business in a few sentences. What does the company do? Who are its primary customers?

Amara Raja Batteries is a lead acid battery manufacturer. They own the popular Amaron brand. They produce automobile and industrial batteries. They supply to almost all major auto companies (4 wheeler & 2 wheeler) and telecom companies.
Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?

The sector is growing and is likely to continue its growth trajectory. Industrial batteries will be required for both new and replacement demand for a larger installed base of UPS & power backup users (Hospitals, Offices, Telecom towers etc). Similarly, demand for automotive batteries will continue as the replacement demand will continue to be robust. Dieselisation of cars will also drive towards more powerful batteries and Amaron is better placed inthis regard than its primary competitor and market leader Exide.
What is the current market share of the company? Can the market share be increased?

4 Wheeler = 26%
2 Wheeler  = 0% (Just getting started, so good growth expected in this segment)

4 Wheeler = 34%
Who are the primary competitors? Why is this company a better investment than them?

The market is an effective duopoly between Exide and ARBL with Exide being the market leader.

ARBL, being the smaller company, has been able to grow much faster compared to Exide. In addition, ARBL has much better return ratios (RoE = 29% vs 16% of Exide).

Exide’s PE is 29 at CMP of 153
ARBL’s PE is 15 at CMP of 221

Historical data:
Compounded Sales Growth
10 Years: 33.68%
5 Years: 31.48%
3 Years: 20.96%
Compounded Profit Growth
10 Years: 46.64%
5 Years: 34.64%
3 Years: 23.03%
Return on Equity
10 Years: 27.82%
5 Years: 29.36%
3 Years: 29.91%

Compounded Sales Growth
10 Years: 21.62%
5 Years: 19.71%
3 Years: 10.81%
Compounded Profit Growth
10 Years: 25.43%
5 Years: 24.63%
3 Years: 16.46%
Return on Equity
10 Years: 25.63%
5 Years: 26.15%
3 Years: 25.50%
What is the owners’ and managements’ stake in the company?

The company is a JV between the Bhalla’s and Johnson Controls (world’s leading battery company). Both the entities own 26% each in the company.

Jayadev Galla, the MD, is also interested in getting into politics and there was a news that he was to contest polls on a Congress ticket. His mother is a minister in the AP government. This may be a problematic area for the company. The MD delving into electoral politics may not find sufficient time to devote in growing the company's business.
Are management's salaries too high?

Management salaries including profit commissions are extremely high. Between the father-son duo of the Galla’s they take nearly 28 cr (FY12).

How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?

Practically debt-free. Most of the debt is working capital.
For most of the last 10 years, debt level has been very low. Between 2006-07 to 2008-09 debt was relatively higher but has since reduced significantly.
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)?

Exide has zero debt as well. This is a good cash flow generating business.
Is the Networth rising over the years?

Networth has gone up significantly over the last 10 years. It has moved up from 175 cr in 2003 to 823 cr in 2012, growing 18.77% CAGR.
Has the company increased its sale, net profit, operating margins and net margins over the years?

Yes. OPM has been around 15% and NPM around 8-9%.
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?

It has maintained RoE, RoCE at healthy levels and is better than Exide.
Has the EPS growth over the years kept pace with sales/profit growth? (Impact of dilution)

No dilution.
The stock has split from a FV of 10 to 2 in 2007. And from FV of 2 to 1 in 2012.
The company has given a 1:2 bonus in 2008.
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?

Strong cashflows.
Does the company pay tax, dividends every year?

Company pays tax at the rate of around 30%
Dividend payout ratio is 17%
Dividend Yield: 0.85%
Is the Free Cash Flow per share higher than dividends paid?

Much higher.
Is the business capital intensive?

Business is not capital intensive. Company does not need to add debt and has strong cash flows.

What is the expected valuation?

FY13E EPS = 16
FY14E EPS = 20

Expected PE of 15~18 would give a price range of 300-360 in 1.5 yrs (Upside of 35%-60%).
Is the PE ratio below 15?

PE is 15.
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?

Being a duopoly and strong growth expected on the back of replacement demand, a 25%+ growth cannot be ruled out for the next 3 years. In addition, there is a possibility of re-rating to somewhere close to 18-20.
What has been the share price over the last 5 years? Has it matched the profit growth? If not, why not? Does the market know something I don’t?

Over a 5 year period stock has returned 373% vs 8.63% of the Sensex

What will happen if the interest rates go up (or down)?

No impact
What will happen if there is cheap import (from China or somewhere else)?

Very difficult to import and create a retail presence. So, no problems on this  front.
Is the Sensex/Nifty PE above 22 (broader market overheating)

Sensex PE is around 17 and P/B is 3.13. Not very overvalued but it has run up in the near past.

Recommendation: Long term investors can add ARBL to their portfolios at the CMP and add more on dips or on periodic basis.

Disclosure: I am invested in ARBL and am likely to increase my exposure in the future. Please do your own due diligence before investing.

Thursday 20 September 2012

Screener.in -- Excellent resource for investors

I happened to look closely at www.screener.in today. For those of you who have not looked at it, I strongly suggest you do. At first glance, there are many things which I found to be excellent. I usually use moneycontrol and the edelweiss screener but I think this is as good if not better. The company data is definitely better than moneycontrol as it gives a 10 year view.

Here are the things which I really liked.

For Company Data:
  1. Historical annual data for the past 10 years
  2. A graphical view of the promoter holding for the last 5 years.
  3. Quick view charts on operating performance and stock price vis-a-vis Sensex
  4. Peer Comparison
  5. Points out some very key Pro's & Con's for the company/stock
 For the Screener Functionality:
  1. Built in screens (there are quite a lot of very good built in screens available)
  2. Ability to create your own screens 
  3. Ability to create email alerts for the screens (this is really great for lazy people like me)
  Dislclosure: I am not connected to screener.in and am not soliciting users on its behalf :-)

Monday 17 September 2012

Stock View: Cravatex

Cravatex is mainly a trading company. It sells fitness equipment (gym and home exercising) under the “Proline Fitness” brand. It is also the sole distributor of FILA and Dunlop in India. Primary customers are gyms and retail customers.

The sector is growing. Health consciousness in growing a lot. Talwalkar’s and Gold’s Gym are growing well. Talkwalkar’s expect to grow 30% in the next 2-3 yrs.
Cravatex has strategic tie-ups with both these chains.

FILA has the lowest market share amongst the established brands of international footwear in India. The market leader is Adidas (including Reebok), followed by Nike & Puma. FILA is just getting into the market and is competitively priced. So, market share is likely to increase provided it can increase its distribution capacity significantly. In the fitness space, the company has 28% of market share.

The promoter holding has been consistent at 75% over a fairly long period.

The company's networth has been steadily rising. From 10.74cr (2002-03) to 30.85 cr (2012).

It has increased its RoE significantly in the last 3 years. This has come mainly from an increase in net margins (probably the FILA brand making its impact felt).

Risks & Concerns

Total debt is 28.14 cr (cons). It has gone up from 17.64 cr (cons) from 2011. D/E is 0.87. It seems to be on the higher side.
Cash flow has been consistently negative over the last 3-4 years.


Cashflow is negative so can't really do a DCF analysis.

On EPS estimates, with an assumption of 15% growth for 2013 & 2014, the expected EPS are 36 & 42 for the next 2 years.

Assuming a PE range between 10-15, the optimistic and pessimistic price ranges work out to:-

2013 –> 367 to 551
2014 -> 420 to 630

Conclusion: At CMP (425), the stock price has nearly halved from its high of nearly Rs. 800. The results for Q2 is also likely to be weak and the under-performance for the stock is likely to continue for some more time. On the medium term, however, the stock is priced well enough for adventurous investors to take a bite.

Disclaimer: I am invested in the stock and have a vested interest. Please do your own due diligence before investing.

Friday 14 September 2012

Stock Update: Cera Sanitaryware

The company announced that it has appointed Shri S.C. Kothari, as C.E.O. of the Company. Mr Kothari  joined Cera as Corporate Finance Head. In 2002 was made CEO of the company. He had retired from the company in Aug.2008. So, this looks like an interim measure to bring in the previous CEO back at the helm. 

I am getting a feeling that option 3 is playing out from my previous post.

Valuation for the company and political uncertainty in India continues to be high and investors need to be cautious.

P.S.: Looking at some companies. Should be able to post about them in a couple of weeks.

Saturday 8 September 2012

Stock Update: Cera Sanitaryware

With the untimely death of Mr. Vidush Somany, the MD of Cera, there are a lot of questions in the mind of investors. Here are possibilities:-

1) There will not be any significant long term impact to the performance to the company. Mr. Vikram Somany, the founder and CMD of the company will continue to drive the company.

2) If there are no natural successors, then Mr. Vikram Somany may decide to sell out to another company at a later point in time.

3) If there are other potential natural successors, then Mr. Vikram Somany may continue at the helm or hand over to a professional CEO, till the successor is groomed.

Whichever scenario plays out, the business may see short-to-medium term weakness as it adjusts itself on the loss of its prime mover. The valuation is also not cheap.

Recommendation: Adventurous investors can continue to hold with a stop loss around 320-325 levels. I would suggest gradual profit booking of atleast 50% of your positions and then waiting to see how the business actually pans out. At this moment the risk-reward is NOT in favour of the long term investor.

Disclosure: I am invested in Cera Sanitrayware and HSIL and my views are likely to be biased. Please do your own due diligence before investing.

Tuesday 4 September 2012

Supreme Industries Vs Astral Poly: Quick Look

Here is a quick look at Supreme vs Astral:

Face Value of Share
Net Profit
Op Margin
Net Margin
Inventory Turnover
Asset Turnover
Material Cost
Dividend Payout Ratio
Div Yield
Last 5 yr Rev Growth
Last 5 yr Profit Growth

The numbers are probably self-explanatory! Interestingly, Supreme has consistently improved its RoCE over the last 10 years. It used to be around 10% in 2002-03 and has moved to nearly 45% currently. It's CPVC business has grown 60% this year.

What I am most interested in is however, the composites business, which I think may be a big differentiator. This is their 5th and newest line of business. The company has received ISO approval for making fibre glass gas cylinders and is expected to start their trial run from Jan'13.

Disclaimer: I am invested in both Supreme and Astral and they are in top 5 holdings in my portfolio.