Finolex Cables - Wired for a Turn Around

Finolex Cables is a lading manufacturer of electrical and communication cables. It also sells copper rods. The company has about 15-16% of market share in both electrical and telecommunication cables segments.

• FCL offers the full range of optical fibre cables.
• It has backward integration to produce both Copper and PVC insulation material
• Only cable company to hold the  consumer Superbrand  status.
• The Pune manufacturing operations would be consolidated at the Urse site. This will help further improve the cost competitiveness in the Low Duty Electrical Cables offered by your Company.
• Expansions at the Roorkee facilities will double capacity at a total expense of 100cr.
• Co has a JV with J-Power Systems (which is itself a JV between Hitachi  Cables  and  Sumitomo  Electric  Industries, Japan  who  are  the  world  leaders  in  the  Extra High Voltage Electrical Cables technology, to produce cables in the range of 66KV to 500 KV.
• The marketing JV with Corning was established will market Optical Fibre to cable makers within India. Corning is the creator of optical fibre and has the largest market share in the world for them.
• In March 2012, the Company repaid an External Commercial Borrowing of JPY 3.5 billion which was originally drawn in 2007. The loan was repaid in full and on time out of internal accruals and without resorting to either a roll over or substitute loans.

Future Growth Prospects (Medium to Long term)
Govt of India is making efforts to connect India’s vast rural areas through internet connectivity.
Last 4 yrs the communication cables business has seen a degrowth as telcos have not invested in network infrastructure.

The National Broadband Plan:  The Government of India has approved a scheme for creation of the National Optical Fiber Network (NOFN) for providing Broadband connectivity to 250,000 panchayats on 25th October 2011. The project is estimated to involve more than 100,000 km of optical cable routes and US$ 4 billion in funding.

Defense network:  A large scale Optical Fiber Cable (OFC) network project that has been delayed is the defense network which was expected to get underway. India’s telecom commission has also approved additional funding as requested by BSNL for building the fiber network. The proposal envisages a network to be laid out over 60,000 km to provide connectivity for 129 army, 162 air force and 33 navy stations. The proposal for the pan-India OFC is currently being processed and it will be to the tune of $ 1.3 billion.

Mobile Infrastructure:  Today almost 95% of India’s mobile base terminal stations are connected through microwave which is not able to support the bandwidth explosion. It is expected that the transition to fiber as the connecting medium for the nation’s backhaul network will begin in the next 1-2 years leading to an added fiber demand in the country.

Derivate Losses coming to an end

The company had entered into forex derivatives in FY2007 and made huge losses in FY08 and FY09.  The company has been writing off the losses consistently since then. These contracts are to end in the current fiscal, as per the Management. With closure of these contracts and losses thereof, the profit margins are expected to improve.

Valuations
2013 saw a healthy growth in PAT (& EPS) after a couple of years of stagnation. Net Profit was around 145 cr (up from 98 cr in 2012), growing nearly 48% on the back of a modest top line growth of 9%.
 

FY14 is likely to wind up with a PAT of between 165-180 cr and a EPS of between 11-12. I am expecting a slight PE expansion from around 5 now to 8. 

The probable target is close to Rs 90 in a year's time which is close to 80% up from here. Even without the PE expansion a 20%-25% return is a reasonable bet in my opinion.

Disclosure: I am invested in Finolex Cables and have a vested interest in the stock. Please do your due diligence before investing. This is NOT a recommendation to buy or sell the stock.

No News Worth Noting (For The Markets)

The last few months have been fairly uneventful in the equity markets. During the last 3 months (Feb 14th - May 14th), Sensex has been more or less flat. It was about 19,500 in Feb middle and is close to 19,700 today. In between, it went down to 18200 and up to about 20100. But, you would not believe that if you were clued into the pink papers or the "pink" channels - CNBC, NDTV Profit, ET Now etc. They would make you believe that the world changes with every breaking news!!

Corporate results are being announced and they are mixed. The economy is in a bad shape so it is unjustified to expect that companies would do exceedingly well in this kind of an environment. US economy is limping back very slowly, unlike it's stock market, which is galloping away. Europe continues to be in unknown economic territory.

Back home two interesting events took place:
1) Karnataka election results came out and Congress thumped the incumbent BJP
2) The much touted Food Security Bill was not passed in Parliament as it was not functioning amidst the plethora of scam revelations.

And here goes my comments on these two interesting events:
I read in a newspaper article that after 1980, no party which wins the Karnataka state elections has ever won the elections in the center. So, I am not sure if winning Karnataka was such a good thing for the Congress ;-)

On a more serious note, does this give a sense that the polity will not tolerate corruption as the media wants us to believe? Or is there local factors which loom large in the minds of people which decide the electoral successes of political parties. The answer to that would probably come in 2014.

As for the Food Security Bill (FSB), in my opinion, it is one of independent India's most shameful proposals of legislation. The noble objective of feeding the hungry is being used as an election gimmick without any consideration to how it will be implemented. If the government was so keen on this, it could try to prop up the derelict PDS system. It would not try to do that, as it knows it is not possible to effectively identify and reach the real poor, so it is trying to gather popular votes by announcing a scheme which it very well knows cannot be implemented.

Updated the "New Bookshelf" page

I have a new "My Bookshelf" page where I intend to list some of the best investment books I have read. This will be a work in progress, so do drop in sometimes to check it out.

Gold - To Buy or Not to Buy!!

I was discussing investments with a very senior investor, someone who has been in the Indian markets for nearly over 50 years and has his finger in nearly all major asset classes - stocks, bonds, gold, real estate in addition to his own business, which these days is managed by his two sons.

While discussing investments, he told me, "Beta, sona kharidna thoda thoda har saal. India mein sona ka bhav girta nahi". I was sure he was wrong. I have seen long term charts of gold and have seen severe price corrections. The chart below is what I have seen multiple times. Which shows gold bugs have not made any money from around 1980 till around 2008 - a fairly long period.

Then when I looked at gold prices in Indian Rupees, the mystery was solved. Look at the chart below for the same period. The difference is the $-INR conversion rate. Dollar has appreciated over the years and compensated for the loss of price in gold, thus keeping the INR price of gold high. Looking at this chart, we can clearly see that there has been no long term bear market in gold in India for over 40 years. And the way the dollar is moving with respect to the rupee, I don't see the trend reversing anytime soon.

So, as Peter Cundill used to say, there is always something to do (and learn) in the markets :-)

Dislcosure: I do not own any investment gold (other than family jewellery).

Deepak Nitrite - Interesting play in the chemicals space

Here is a short write-up on Deepak Nitrite.

§         Established in 1970s by Mr. C.K. Mehta

§         Market leader in India for Sodium Nitrite / Nitrate & Nitro Toluenes.

§         DNL is a top 3 global supplier for products like Cumidines and Oximes

§         On par with global players in colour intermediates business

§         Exports are around 44% of sales (FY12) & 29% YTD (FY13)

§         Manufacturing of hazardous chemicals is shifting from developed economies to developing economies due to environmental hazards. India is benefiting from this trend.

§         Diversified  customer  base  consisting  of  some  of  the  largest chemical  companies  in  the  world,  including  Sygenta  Global,  Bayer  Crop  Science,  BASF, Kemira,  Lanxess,  Clariant,  Isochem,  Lonza,  IOC,  Reliance &  Essar.

§         Fuel additives & Solar Salts are expected to be significant growth drivers in the future.

§         Fuel additives grew by 56% in Fy12. It was 98 cr in FY12. In 9mFY13, it is already 130 cr with Q3 35cr. Company is expecting 150-160 cr from this segment this year.

Segments	Organic Intermediates	Inorganic Intermediates	Fine & Specialty Chemicals
Product Categories	Nitro Toluenes, Fuel Additives, Nitro Chloro Benzene, Xylidines, Cumidines	Sodium Nitrite, Sodium Nitrate	DASDA, Oximes, Fuel Additives,  Specialty chemicals
Applications	Agro-chemicals, Pigments, Dyestuffs, Fuel Pharmaceuticals	Pigments, Dyes,, Rubber Chemicals, Explosives, Food Colour, Electro Plating Glass	Paper,  Detergent,  Textiles, Agrochemicals,  Fuel Additives, Pharmaceuticals
% of revenue	57%	16%	27%

Financials

Market Cap: Rs. 273.42 Crores
Current Price: Rs. 260.40
Book Value: Rs. 267.78
Stock P/E: 7.20
Dividend Yield: 2.30%
Stock is Rs. 10.00 paid up
52 Week High/Low: Rs. 325.00 / Rs. 139.00
Dividend Payout Ratio: 16.54%
Debt to equity: 1.18 (high... key monitorable)
Price to book value: 0.97
EPS FY12 = 22.06

9M EPS FY13 = 27.14
Fy13 EPS (exp) = 31-32
FY14 EPS (exp) = 38-40

For the next 2 years, earnings can grow 30%. If there is a moderate PE re-rating (only possible if the mid/small cap market sentiment improves) to 9-10, the price in a year can be around 350-400.

Disclosure: I am invested in Deepak Nitrite and my views are likely to be biased.

A poem for value investors!!

For a change, I am posting a poem that was written by Rudyard Kipling in 1895. It is for all and not just value investors, but it reflects stoicism at its best. One of my favourite poems in the English language :-)

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim,
If you can meet with Triumph and Disaster
And treat those two impostors just the same:
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss:
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much:
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a man, my son! 

Merck - Stable Pharma Major

I have been looking at some Pharma names recently. Let me put a disclaimer upfront. I am not very good at analyzing pharma companies. I am not able to differentiate between most of the companies who sell non-patented generic drugs in India.

Having said that, the numbers for Merck looked good. Below is a glimpse.

Market Cap: Rs. 1050 Cr
Current Price: Rs. 630.00
Book Value: Rs. 291.36
Stock P/E: 13.34
Debt to equity: 0.00
Price to book value: 2.16
Promoter Holding: 51.8%

• Merck Limited was set up in India as Merck’s first Asian subsidiary in 1967. The Company operates both its pharmaceuticals & chemicals businesses in the country.

• Dec'13 (Q4) quarter net profits & EPS have gone up by 58%; Revenues are up 31.8%

• FY12 (year ending Dec) EPS is 47.2 vs 38.4 in Fy11 (Gain of 23%)

Problem Areas

• Large part of the company's revenues comes from areas under govt price control, ability to pass on input cost escalations is not there. This can severely impact margins.
• Company has a performance materials division which makes pigments and cosmetic actives, neither of which is core to the company's business.

Valuation
The company is likely to post a FY13 (Dec) EPS of close to 53-54. At 15 times, the stock can trade at around 800 levels, which is about 25% from current levels. So, not a screaming buy, but something worth looking into for stability and moderate returns over the short term.

Disclosure: I am not invested in Merck at this time. I am not yet decided whether to invest or not. Please do your own due diligence before investing.