New trading Blog

Started a new blog for trading calls.

Trades for tomorrow:

http://growthtrades.blogspot.in/2015/11/cash-and-futures-trades-for-23-nov-2015.html

Visit regularly

http://growthtrades.blogspot.in/

Phoenix Lamps: Rising from the dead! Good potential Multibagger

Having learnt from both Warren Buffet and Phil Fisher, I have added to my own one of a kind style of stock examination that includes around 40% of investigation on the ground.  I would like to call this the Holmesian way of analysing stocks - unlike conventional analysis that relies heavily on secondary research, this creates a double loop mechanism that feeds into the other engine and helps validate or reject the thesis. This has often proven to be quite an advantage in micro caps where often “what you see is not what you get in the numbers” and vice versa.

Phoenix Lamps Ltd. ( Previously known as Halonix Ltd.) is a manufacturer of automotive halogen bulbs in India with an approximate market share of 50% in Passenger Vehicles, 70% in commercial vehicles and 70% in two Wheeler OEMs . The company is the largest manufacturer in India and also claims to be among top five globally. A near monopoly business in automotive head lamps/tail lamps gone terribly awry through a diversification into CFL’s which is cut throat, high intensity, B2C, branding heavy business. A decade later and the mistake corrected through a slump sale of the loss making CFL business Though there has been slowdown in automotive industry, but the overall long-term outlook remains positive. Phoenix Lamps Ltd., being market leader in this business is expected to grow along with the industry.

A look at the ratios and you will be impressed. High RoE, high ROCE, FCF positive business with high asset turns (11 x FA turns) with a 20 % + EBITDA margin with ROCE of 30 % +. It’s got near FMCG characteristics given the standard nature (A friend at bosch says the key to a higher margin business in auto is a. high standardization b. high value to weight/volume c. OEM + after market possibilities and that’s why bosch is always in things like ABS, wipers, air bags which are critical parts and fairly standard. The only exception are high finesse items which involve a lot of high

end labour like machining and critical engine parts.

Recently Suprajit engineering has acquired 51% of Phoenix Lamps (PL) from a PE investor at agreed price of Rs 89/share with an option to increase the stake to 62% later and this got me delving deeper again.  Let’s get the easy one out of the way –actis has been stuck in the company for 9 years and started selling down their shares (from 70 % to 60 % ) and this has resulted in the share price going down from Rs. 180 to Rs. 100 over six months with no change in fundamentals. That’s gone and a simple reversion to mean should take this atleast 50 % up.

Suprajit is well known to value investors in the indian market. I have personally interacted with ajit rai and I think he is an outsider CEO – buys cheap and is an exceptional operator with a focus on bottom line and cash flows. He has been looking at acquisitions for long and finally bought one which in his own words was a company that manufactures : Scalable, global standardized product, With a market leadership position in india market, With export possibilities, Complementary to his core business of two wheeler cables, High margins and strong cash flows with minimal debt. Given what he has done with suprajit – have a look at ROIC of 30 % consistently and his own salary/remuneration etc. and I am sure that he will do a good job of at least maintaining status quo – which by itself should lead to a re-rating.

Concluding:

Phoenix Lamps Ltd is a manufacturer of automotive halogen bulbs in India with a dominant market share. The “General Lighting” business of the company had been a drag on its financial performance for several years but that business has been sold on a slump sale. From now on the company is expected to post consistent profits on its Automotive Lamps business. Due to buoyant market conditions and Special dividend, the stock is trading at very fair valuations for the expected earnings.  Suprajit management is generally reputed to be fair & honest. They have indicated that they will at some point in the future merge the two companies and there will always be a question mark on the merger ratio until the event happens Currently the stock offers little valuation discount. I see little downside here given the open offer at Rs. 100/share and a 2-3 x upside.

Re Post: Anuh Pharma

Draft 1
 The company is one of the largest manufacturers of macrolides, a kind of antibiotic drugs in the country.Among the macrolides,the company manufactures antibacterial erythromycin base and several other variants (primarily recommended)for throat infections by ENT specialists and General Physicians); it is the largest producer of erythromycin salts in the country. The company also makes higher macrolides including azithromycin, roxithromycin and clarithromycin;quinolones like ofloxacin; chloramphenicols and over a dozen corticosteroids. The company also offers an Anti TB Drug called as Pyrazinamide. All these products are being manufactured at the company’s Tarapur facility near Mumbai. The company also owns a state-of-art integrated laboratory to carry out research and development activities; this facility was acquired from a Spanish company in April, 2012. The R&D facility includes a chemical synthesis lab, an analytical development lab and a kilo lab with the view to cater to Contract Manufacturing. The R&D facility will help the company in intensifying their research & development activities with a view to enlarge the bulk drugs portfolio. All these things have helped Anuh Pharma to carve out its own niche in the world of APIs. The company is looking at different opportunities in untapped markets and also across a value chain. Today, the company is known for its Government recognized ‘Star Export House’ status; governed by cGMP, the company enjoys World Health Organization’s (WHO) version of GMP (Good Manufacturing Practice). In addition, the company has also filed several Drug Master Files (DMFs) submitted to European Directorate for the Quality of Medicines & HealthCare (EDQM) & US Food & Drug Administration (US FDA) which could create immense opportunities for erythromycin’s exports to US and Europe, going forward. The company has been exporting one-third of total production to over 57 countries and the company recently received approval from COFEPRIS (Health Authority of Mexico) GMP certificate for three of company's erythromycin products.

update:

Anuh Pharma is around Rs 330 this morning !….yet down from ex bonus High of Rs 414.75 on August 12,2015…It was a liberal 2:1 Bonus with xb date being August 5,2015.Cum Bonus the Share Price was at times over Rs 1000. 52 Week xb High of Rs 414.75 implies a cb Price of Rs 1244 while today’s xb price of Rs 340 implies a cb price of Rs 1020 .It was at just Rs 130 twenty months ago in January 2014.Gains are @ 700 % since then in 2014-15 till date

The Face Value is Rs 5 and the Equity has jumped from Rs 4.18 crs to Rs 12.54 crs with the Bonus

FY 15 PAT was @ Rs 22 crs with EPS over Rs 26.Reserves at March 31,2015 were Rs 96.7 crs giving a networth of @ Rs 101 crs and a Book of @ Rs 121

Post the Bonus the Book had moved to just over Rs 43 (Rs 40 at March 31,2015) after considering the Rs 8 crs profit in Q 1 FY 16

Assuming a FY PAT of Rs 25 crs and Rs 30 crs the FY 16 EPS would be @ Rs 10 and Rs 12 respectively

Fy 15 the Dividend was a healthy Rs 7 or 140 % (Interim of Rs 2 ~40% & Final of Rs 5 ~100%)…this was @ 26.5% payout from FY 15 Profits.Assuming similar payout for this year the Dividend should be @ 50% to 55 % on enhanced capital and would entail payout towards @ Rs 7 crs

Adjusted for FY 16 Projected Dividend the Networth should be @ Rs 120 to Rs 125 crs giving a Book of @ Rs 48 to Rs 50 at March 31,2016

Using FY 16 Projected EPS & Book at the current share price of Rs 340 this would give a PE Range of 28 to 34 and a PBV of @ 7

Even if Zero Debt such Valuations are High and need to be supported by high CAGR or non linear growth in the offing over the coming years or a Takeover Situation.Last 5 Years CAGR on Topline is 10% and on Bottomline is 12%….. exciting to run up such Relative Valuations?.So if it’s not based on the Past is there any Game Changing or Life Changing Future or Takeover that’s exciting ?

Though the Company has acquired 7800 sqm adjoining existing 3600 sqm Tarapur,Boisar Factory Land for expansion it also states that they have enough capacity to produce more on demand and increase market share without further capex spend…they have a rated capacity of 900 mtpa for macrolides etc though maximum achievable capacity is 1140 mtpa and 12 mtpa for Corticosteroids…they are currently operating at 65% of the achievable capacity …that should be @ 750mtpa

FY 15 Annual Report does not show any significant addition to Fixed Assets on account of the 7800 sq m land purchased .This must reflect in FY 16 accounts

FY 16 Topline is expected to be Rs 325 crs with continuing double digit ROE and ROCE with over 40% coming from Exports.

Thus it would seem a depreciating Rupee can be a favourable situation until one observes that in FY 15 the FX Spend on CIF Imports,Commission & Travelling were to the tune of Rs 185 crs while Export FOB Revenues were @ Rs 120 crs….so there’s a net outgo….Moreover USA was not where Exports went although they have submitted the DMF to USFDA for two Erythromycin products . 41% of FY 15 Sales came from Exports of which @ 75 % were from Europe and Latin America with the rest coming from Africa and Asia.

Thus FX Operations are in excess of Rs 300 crs in the Company and this would require Currency & Treasury management expertise to manage.FY 15 Annual Report reveals an FX Loss of Rs 2.78 crs,Raw Material Imports of Rs 193 crs,Brokerage & Commission Expenses of Rs 2.98 crs

Anuh Pharma is the largest producer of Erythromycin Salts in India and in the Top 5 in the World for both Erythromycin and anti TB Drugs (Pyrazinamide).Competition is from South East Asia and China.It commands an 18% & 20% Global Market Share for Erythromycin Salts & Pyrazinamide respectively

Anuh Pharma is part of the SK Group of the Mumbai based Shah Family and for FY 15 it presented it’s 55th Annual Report….It however completed 25 years of production on February 14,2014 when it declared a special interim dividend of Rs 1.25 for this

Interestingly the Authorised Capital is now increased in great quantum from Rs 10 crs to Rs 51 crore to facilitate the liberal Bonus and more pointedly to facilitate issue of fresh equity in requirement for funds

They also now have an enabling resolution to borrow upto Rs 200 crs.

This clearly is for the Expansion on the new adjoining land of 7800 sq m,that’s over twice existing Tarapur land of 3600 sqm, that would serve Regulated markets with a State of the Art Facility planned to be commissioned by FY 17

What is really interesting is that the New Authorised Capital has room for fresh issue of 7.7 cr shares !…at current market price of Rs 340 that would mean raising over Rs 2500 crs through Equity ! while Borrowing Powers are restricted to just Rs 200 crs !…..If the Funds are raised to this maximum the Networth flies past Rs 2600 crs from just Rs 120 crs ! and the Capital Employed jumps from Rs 120 crs to over Rs 2800 crs with Full Borrowings of Rs 200 crs

What a Giant Leap this would be assuming such Quantum of Funds are required for Projects !….Project & Expansion Capex & Cost Details are not available

Such a Leap would take Promoter Holding down to just 17.5% assuming they do not participate in the fresh equity exercise.Such a drastic dilution would make the Promoters vulnerable and is therefore unlikely

They currently hold 71% already in an exiting Equity of Rs 12.54 crs.They can hold a maximum of 75% which if the Equity does move to the maximum 10.2 cr shares and Rs 51 crs they can hold a maximum of 7.65 cr shares from the current 1.79 crs they hold.That would require them to infuse Rs 2000 crs themselves.Nah!.What probably will happen is that Promoters will dilute their Equity Stake to quite some extent in the Fresh Infusion of Equity Funds,most probably through a Preferential Allotment or QIP Placement.Currently there is no institutional holding

Clearly the Shah Family which holds over 71% (up from 65% earlier this year) or 1.79 crs of the Equity is very ambitious and realise that after 55 years they have just Rs 120 crs networth to show in the Company although with today’s over 10% rise in share price the Market Cap has crossed Rs 830 crs ! making the Shah Family worth nearly Rs 600 crs only on this Flagship Company.This Company is run by Bipin Shah,MD while his Director Brother Bharat Shah overseas other enterprises in their SK (Sevantilal Kantilal) Group.They say the Group’s Employee strength is over 2000 but Anuh Pharma shows just 130+ on it’s rolls as per the FY 15 Annual Report.Thus one can assume Group Financial Strength is much more than listed Flagship Anuh Pharma indicates.They do deserve a compliment for keeping Director Salaries Scales at fair and acceptable levels to other stakeholders of the company.We see many Promoters unjustifiably reward themselves in several crores annually through Salaries,Perquisites and Incentives

Looking at Global Demand for Macrolides etc there appears little reason for Expansion of Capacities by Anuh Pharma unless the New Facility is for Newer Products and Newer and Bigger Regulated Markets…there is promise and hope of both in the years ahead but the journey could be long

I have recommeded Anuh Pharma 20 months ago in January 2014 at Rs 130 levels and at 330 ( before split ) and Market Cap of Rs 100 crs on a networth of @ Rs 80 crs and has risen nearly 700% to current xb Rs 340 in the period and a Market Cap of near Rs 850 crs and a Networth of just over Rs 100 crs.

Strong Hold / Add more on declines.

GTM-2 Answer: Umang Daries: Turn Around company, High Potential Multibagger

After recommending KSE Ltd  (Link here) , I see similar potential in Umang Daires

Answer of Guess The Multibagger 2:


India remains the largest milk producing and consuming market in the world. Milk prices registered significant inflation during the year, impacted by increased cattle feed costs at a domestic level as well as external economic and regulatory factors. While liquid milk consumption continues to drive the industry, there has been a significant shift in the dynamics of the value added segment of dairy with access to milk, portfolio strategies and increasing investments determining the right to succeed.

The dairy industry continues to benefit from an array of factors including increased per capita income driving the need for value added products, economic activity on the rise in the metro cities and the emergence of modern format retail with increased emphasis on cold chain infrastructure.  Demand for Dairy products is expected to remain robust. With increased purchasing power in the hands of Indian populace, more particularly rural one, larger number of people are likely to opt for milk products for better nutrition. Consumer preference is likely to be for long shelf life products. With increased awareness of hygiene /nutrition, packaged milk will progressively continue to replace loose milk. Value added dairy products are expected to grow at about 20%.


 Umang Dairies Ltd  was incorporated on 2 Dec.'92 by Straw Products and J K Industries by the name of J K Dairy & Foods . Not many people know Umang Dairies Ltd is a JK group of company .  The company was making losses and went into BIFR . BIFR scheme was implemented in 2009 and after BIFR scheme implementation majority stake is acquired by JK group.  Bengal & Assam Co Ltd has a stake of 45 % in Umang Dairies Ltd and total promoter holding of JK group is 74%


Umang Dairies, is a dairy product company of JK Organisation, which has medium-sized businesses in cement, tyre and paper with a turn over exceding $1.5 Billion. Umang’s key brands are White Magik, Dairy Top and Umang Ghee. In January 2014, it launched its liquid milk in Lucknow under the brand name JK Milk. Umang also makes products for private labels. It is managing a facility to process and pack liquid milk in poly-pouches for Mother Dairy.

The company has a drying plant (300,000 litres per day) and a liquid milk packaging plant (500,000 litres per day), both in Uttar Pradesh. Utilisation of the drying plant was just 55% in 2011-12; it is now up to around 75%. The liquid milk plant is operating at nearly full capacity now. Umang has 300 villages and 12,000 farmers in its milk collection network.

Demand for milk is outstripping production. However, demand does not easily translate into sales and profits. To quote from the Umang’s annual report, “Pressure on land resources is increasing. There is no way to increase the availability of land for fodder production. (The) Answer lies in the usage of high-yield fodder crop techniques and simultaneously replacing low yield breed of milch animals by high yield ones.”



Umang was in a bad financial shape until two years ago. But it turned around after restructuring and revenues went up from Rs150.22 crore in 2011-12 to over Rs216 crore in 2013-14. For the quarter ended December 2014, sales were Rs69.96 crore (Rs55.20 crore) and the net profit was Rs2.60 crore (Rs1.26 crore). For the year ended March 2014, sales were Rs216.38 crore (Rs173.80 crore) and net profit was Rs5.96 crore (Rs12.30 crore).  The net profit for this quarter came at Rs 3.57cr, exactly same as last year. There is a drop in sales this qaurter but this due to the upgradation process which will increase produciton by 25%. Howevever the company managed to bring down raw material costs by 28% and this resulted in overall costs coming down by 23%. Consequently, EBITDA came in at Rs. 7cr, up 17%.

Over the past five quarters, the average growth in sales of Umang has been 44% and the average growth in operating profit was 119%.  The return on net worth is 28%.The return on capital employed is 27% with a debt-equity ratio of 0.72. The cash earnings per share were Rs3.39. Valuation is low. The 3 year average return on equity stands at 390%.Umang’s market-capitalisation is 0.5 times sales.


 
The face value of the share is Rs5. Umang has distributed dividends of 20% in September 2014 for FY13-14 and 15% in July 2013 for FY12-13.  The share is trading at around Rs56, at a PE of 14 with industry PE at 40.   This company  would also be an excellent takeover candidate, in case the Singhanias (the promoters) decide to exit. One recent development is Groupe Lactalis SA (Lactalis) (which is the worlds largest dairy player) has shown serious interest to buy Umang diaries.  Bengal & Assam Co Ltd  has all the subsidiary companies as unlisted . If the company decides to delist Umang Dairies Ltd , then we may get 50 -150 % return in no time but that will be quite less to long term prospect of this company.

There are only a few companies which get turnaround after BIFR scheme implementation one of them is Symphony Ltd.  There are few differences in Umnag dairy and Symphony like the business model of Symphony is superior, attractive return on capital employed and it has all India presence etc. But there are many similarities between them . No doubt, there is enough competition in the dairy sector. Good promoter backing and comfortable debt to equity may help the company grow big. Umang Dairies Ltd  may achieve similar heights and it is on the same path of Symphony Ltd. The stock is worth buying for the long term.

Defensive series: Stocks to Buy in a bear run ( Continued )

Marksans Pharma

Marksans Pharma, which was a wholly-owned subsidiary of Glenmark Pharmaceuticals, manufacturers generic pharmaceutical products, such as soft gelatine capsules & tablets across regulated markets, in niche segments. It supplies its products to 25+ countries globally; UK, followed by US, are its largest markets. Its export business contributes to more than 99% of revenues with a focus on regulated markets.

Marksans’s manufacturing facilities are based in Goa and Southport (UK). These are audited by some of the most demanding global regulatory agencies in the US, UK and Australia. The business is driven through three subsidiaries—Nova Pharmaceuticals (Australia), Bell’s & Sons (UK) and Relonchem Ltd (UK).

Abbreviated new drug application (ANDA) approvals, led to a ramp-up in the US business in the past two years. Softgel product ibuprofen (OTC) is now selling at leading stores like Walmart, Walgreens and CVS. Other non-softgel ANDAs have also been approved and are being marketed via partners in the US. The softgel capsules market offers an edge to Marksans due to the complexity of developing the softgel formulation and high operational costs in running a manufacturing facility. 

It has generated a strong revenue growth in the past three quarters ended December 2014, averaging 34%. Operating profits grew 44% over this period, with an operating profit margin of around 30%. It enjoys a RoCE of 41% while market valuation is an expensive 22 times operating profits.

JB Chemicals & Pharmaceuticals

JB Chemicals & Pharmaceuticals manufactures and markets pharmaceuticals formulations, herbal remedies, and APIs in India. Its three brands, viz., Rantac (anti-peptic ulcerant), Nicardia (calcium channel blocker) and Metrogyl (amoebicides), feature the top 300 brands in terms of value and unit sales, as per data from IMS MAT March 2014. It is ranked 36th in the industry, with these three brands.

 

 

Its total exports income amounted to Rs574 crore which represents 58% of total operating revenue for FY13-14. The API business continued its upward momentum and, with sales of Rs99.33 crore, registered a growth of 59% over the same period, thanks to its wide presence in the international market. Its manufacturing facilities have approvals from authorities US, UK, Australia, South Africa, Ukraine, etc. JB Chemicals aims to create an additional capacity for tablets, liquids, ointments, vials, eye-drops, lozenges and diclofenac API plant by investing Rs140 crore on expansion. Clearly, there is no slowdown in its business. Over the past three quarters ended December 2014, the company has averaged a revenue growth of 11% and an operating profit margin of about 18%. This is one of the few companies on our list which makes a low RoCE of 11%. The stock is appropriately valued—lower than others. Its market-cap/operating profit is around 12. 

Century Plyboards

Century Plyboards is the largest producer of laminates in India and accounts for 7.5% share of the national plywood market. Year-on-year volume growth in plywood production was nearly 10%; it was about 19% in laminates, for the quarter ended December 2014. Almost 23% of the company’s revenue is from exports. Century Plyboards is looking to diversify into modular furniture and kitchen furnishings. It has six strategic manufacturing facilities across India to meet the steady growth in real estate and construction which will drive its growth for years to come.

All ply-board manufacturers face issues with raw materials from time to time, thanks to stricter conservation policies. Myanmar banned export of timber in August 2014 to save its disappearing forests. But Century Plyboards was not affected by the ban because it had set up a semi-processed peeling facility in Myanmar in 2013. So, while rivals, such as Greenply Industries, were hit by skyrocketing timber prices, Century Plyboards could easily export timber from its Myanmar facility. Revenues have grown at a steady rate of around 20%-25% each quarter and it was able to maintain an operating profit margin of 10%-15% over the past seven quarters. Century’s RoCE is 26% and the stock is quoted at 18 times its operating profit.

TVS Srichakra

TVS Srichakra is a well-known maker of tyres for two-wheelers, three-wheelers and off-road vehicles. It plans to launch radial tyres for two-wheelers in a couple of months. Its domestic clients include Atul Auto, Bajaj Auto, Hero MotoCorp, Honda Motors Cycles, Scooters India and TVS Motor Company. It exports its products to the Australia, Europe, Africa, South America and United States. It recently entered into 15 new export markets and now exports to over 80 countries. Exports constitute about 13% of its turnover.

TVS Srichakra enjoys the highest market share amongst two-wheeler manufacturers in India. It is projecting a 15% expansion this fiscal and similar growth next year, as it expects two-wheeler sales to rise. Over the past three quarters ended December 2014, it averaged a 17% growth in revenues. Operating profit growth averaged around 70% over this period. TVS Srichakra has maintained an operating profit margin of 9%-10%. The more positive part of the stock is its valuation. While it enjoys a RoCE of 30%, its market-cap to operating profit is around 8. 

The stocks discussed in this Cover Story will be less vulnerable to a market decline because these companies are on a track of higher growth. The growth comes from a business model that combines domestic and export revenues, or substantial export revenues. Unless there is a synchronised global downturn, as happened in 2008, these companies are expected to do well.

Defensive Series: Stocks to buy in Declining Market

(Please note: This is NOT Guess the Multibagger 2, GTM-2 will be released on the weekend )

This is a new series im starting ; Safe stocks to buy even on a declining market.

The biggest hurdle to finding a winning stock-picking strategy is that no strategy works under all circumstances. Indeed, after the bull run in the Indian stock market over the past year, finding hidden gems is an even more difficult task. Companies with strong and unimpeded growth are too expensive. Companies that are not exactly of the highest quality are expensive too, thanks to the bull market that has pushed up all kinds of stocks to multi-year highs.

In such a situation, the better bets are companies that, at least, have rising earnings, that is, companies that consistently make more money than they did the year before, thanks to a good business model. There is no easy formula for picking such companies. Every method of picking stocks requires some interpretation and judgement. We need to look for companies that have a diversified portfolio of products or niche products and a well diversified geographical presence. This ensures that demand is not affected by a slowdown or restriction by government regulations in a specific country.

I have looked for stocks that meet these criteria and have found them across sectors like consumer products, building materials, pharmaceuticals, industrial intermediaries and auto-component manufacturers. The companies we have picked delivered a substantial and continuous growth over the past four quarters, thanks to some edge they enjoy. Most of them have a strong export presence which helps to improve even domestic operations. Take a look at these stocks discussed below.

Granules India

Granules India is one of the few companies to offer its clients all three components of the pharmaceutical manufacturing value chain starting with active pharmaceutical ingredients (APIs), pharmaceutical formulation intermediates (PFIs) and finished dosages (FDs). Regulated markets, such as North America and Europe, account for approximately 65% of its revenues, while the rest comes from quality-conscious customers in Latin America and the rest of the world. It is among the global leaders in manufacturing paracetamol, ibuprofen, metformin, guaifenesin and methocarbamol.


According to the figures for December 2014 quarter, 42% of the company’s standalone sales came from FDs while 25% was contributed by PFI and 33% by APIs. It has a 30% market share among regulated market suppliers of paracetamol. Granules Biocause, a subsidiary, has a 16% market share of ibuprofen suppliers. Granules India delivered a robust revenue growth of 26% compounded annually and profit after tax of 63% compounded annually over the five-year period ended FY13-14. Over the past four quarters, it has averaged a revenue growth of 16% and operating profit growth of 38%, maintaining an operating profit margin between 18%-20%. Its RoCE, at 25%, is not among the top league of companies in terms of returns; so its valuation (market cap/operating profits) is lower at 8.42.

Kitex Garments

Kitex Garments is the second largest producer of children’s apparel in the world. It has been exporting from India and is now setting up operations in the US. Its dominance in the highly specialised infant-wear market comes with an edge—it is a segment where competitors have found the going tough due to stringent safety norms. Kitex derives around 80% of its garment revenues from exports, of which 90% are to the US and 10% to Europe. It has five large clients—Gerber, Toys R Us, Jockey, Mothercare and Carters—and has added two more large clients recently, viz., Children’s Place and Kohl’s.

 

The largest manufacturer of infant-wear globally is China’s Wingloo which has a capacity of 750,000 pieces per day against Kitex’s capacity of 550,000 pieces per day, according to Motilal Oswal Research. Kitex plans to be the No.1 player in infant-wear market in the next few years.

 

 

According to analysts, to improve productivity, Kitex plans to replace sewing machines older than five years with newer ones which would increase the speed from 7,000 stitches/hour to 9,000/hour and consume one-third the power of old machines. It has now introduced an Italian robotic technology which drastically reduces labour. Similarly, it has installed a bow-making automated machine requiring just one person compared with 50 people earlier. All these measures make Kitex even more efficient. The stock has had an extraordinary run ever since it started acquiring scale and larger contracts. Over the past four quarters ended March 2015, Kitex Garments averaged a growth of 16% year-on-year. Operating profit grew at an average rate of about 80% over this period. Its RoCE is around 48% and, given that factor, valuation is less expensive than many large Indian consumer products companies. Its market-cap/ operating margin is 23 times. 

Cmp 810. Short term traders can buy at 810 for a target of 950. Long term investors continue buying in sip or at declines. ( Given to members )

Guess The Multibagger

Guess the Multibagger / Gem - 2 ( Easy )

• A well reputed group is managing  this company. Another listed company holds more then 15% stake in this company.

• The top line is consistently growing. 

• The demand for this product is outstripping production. 

• This company was in a bad financial shape few years back but has turned around. 

• The average operating profit margin growth has increased 110% in the few quarters. 

• Promoter holding is more then 60%

• The Debt to Equity stands under 1. 

• Return of capital employed  stands more then 15% 

• This company is an excellent candidate for take over. We may get 50%-200% in no time if the promoter wanted to exit. 

The Multibagger will be released on Saturday 30th May 2015

You can email if you have any queries: growthinvestortrader@gmail.com

International Combustion - Good potential Multibagger

International Combustion (India) Ltd, promoted by International Combustion (Holding) (ICHL), UK, which was taken over by Northern Engineering Industries, was incorporated as a private limited company. It was a 100% subsidiary of ICH. The company  manufactures and markets automobile and industrial equipment. It operates its business through two segments: Mineral & Material Processing & Handling Equipment and Geared Motor and Gear Box. The Mineral & Material Processing & Handling Equipment segment engages in mineral, material processing and other handling equipment. The Geared Motor and Gear Box segment engages in gear boxes and other automobile products. The company products which include, vibrating screens and feeders, cone crushers, bulk material handling equipment, mining haulages, Raymond grinding mills, air classifiers and flash drying systems and geared motors and gear boxes. International Combustion (India) was founded on April 22, 1936 and is headquartered in Kolkata, India.




The company serves all the major core industries including mining, steel, cement, petrochemical, construction, sugar, power, textile, paper, rubber, pharma, chemicals etc. The company has served to an esteemed set of clientele that includes industry leaders such as Sail, Tisco, JSPL, Essar Steel, Amtek, Ashok Leyland, NMDC, Hindustan Zinc, ACC, Madras Cement, NTPC, Bayer, Dabur, Borosil, EID Parry, HUL, Marico, L&T, McNally Bharat, Thermax, Simplex, Alfa Laval, AP Paper Mills, MRF, Andhra Sugars, Cadbury India, Britannia, Nestle, HLL, Tata Chemicals, Reliance, Laxmi Machine Works, TNPL, Nevyeli Lignite, Nirma, P&G, etc. We believe, the diversified industries as its customers, not only provides ICL wider exposure, but also keeps the company isolated from the risks of slowdown in a particular sector/industry.

Fully equipped manufacturing facilities at Calcutta, Nagpur and Aurangabad ensure total control over production and product quality. IC’s products are characterized by high availability, low operating cost and energy consumption and protection of the environment. High quality products and continual search for peak technical performance, IC’s strong marketing and service organization spread over the country assures quick and direct contact with customer during all phases- Consultation. Contractual negotiation, followed by execution and after sales services. Company has offices at Bangalore, Chennai, Hyderabad, Mumbai, Delhi, Nagpur, Pune, Vadodara & Kolkata, with employee strength of 500.


Foreign technical collaborations and licensing agreements with world leaders in the respective product groups have ensured manufacture of premium quality equipment, alongwith core focus on :-

Technology Absorption & Research & Development –  The company has always been recognized as technology leader in the area of operations and this has helped the company to continually expand the business, both in India and abroad, this trend is expected to continue in future also. Several steps have been taken to improve the efficiency of the equipment's presently manufactured by the company, which resulted in substantial increase in the productivity of the end users, in future also the company is planning for continued up-gradation program of their product range to match with international standard from time to time, which helps company to remain competitive against cheap products which are less adaptive to local requirements.

Company takes full advantage of complete absorption of latest technology received from the Globally renowned, leader of their industry Licensed Partners and implement the same commercially, which helps company to match the quality of their products with the international standard at competitive pricing.

The engineering division (MMPHE) has few products of huge significance such as screens, feeders and others which are being supplied to steel (including SAIL, TISCO) and cement industries. The company enjoys leadership position in the above products with nearly 70% market share. Further, the product offerings include Sugar Graders / Sizers which is said to have pioneered by the company and thus commands a dominating position in this industry

Licensing partners of International Combustion are GLOBAL LEADERS, and as below :

In 1961, the company started its manufacturing activities, and presently has three business divisions, viz
Heavy Engineering Division (Nagpur & Kolkata Factory)

Vibratory Equipment : Grizzly Screen Feeder, Linear & Circular Motion Screen, Mogensen Sizer (Sizers, Sizer 2000, Bar Sizers & Vibro Bar Sizers), Omni Screen, Flip Flop Screening Machines, Vibrating Feeders (Mechanical Feeders & Electromagnetic Feeders), Vibration Exciters, Polyurithine & Rubber Screen Decks & Liners & Monitoring Systems for Electronic Vibrating Machines



Grinding Mills Classifiers for Drying Systems : Raymond Roller Mills, Raymond Impax Pulverizers, UFG Vertical Mills, Turbine Air Classifiers, Mechanical Air Seperators

Bulk Material Handling : Spiralling Belt Conveyors, Scooping Belt Conveyors, Girdle Pocket Elevators, Apron Feeders, Haulages.

Crushers : Jaw Crushers, Cone Crushers, Vertical Shaft Impactor, Roll Crushers.

Rotary Drum Dryers / Coolers : Mozer Drum Dryer & Cooler, Allgaier Process Fluidised Bed Plants

Bauer Gear Motors Division (Aurangabad Factory)

B2000 Series : Shaft Mounted Geared Motors, Roller Tabled Geared Motors

G96 Series
Being a leading suppliers of high quality Bauer gear motors & gear boxes with extensive success in Mill Table, Rolling Mill, Bottling Plant, Conveying Packaging, Water & Waste Water Technology, Environmental Technologies & Textile Printing, Packaging, Crane Application, Etc.
Utilizing Bauer’s application and expertise customers can work with them to choose the correct gear motor manufacturing facilities that enable them to deliver a complete solution to fit all type of environment and demands. With in-house motor manufacturing facilities specialized motor characteristics can be designed and optimized to cater with precision exactly what the application demands. Fully crowned gear teeth provide the highest misalignment and torque ratings & smooth axial travel.



Project Plant Systems

Crushing, Screening & Conveying Systems for Iron Ore, Aggregate, Coal and other Minerals.
Project Division is well equipped for Design, Engineering with Electrical and Automation of complete Crushing Systems and equipment., Company’s extensive experience in handling systems for Coal, Limestone, Iron Ore ,Aggregate and other minerals can give the customer the most effective solution. We can provide complete solution with supply of Structural and civil engineering, Erection & commissioning of the complete plant.

Tertiary Crushing  and Sand manufacturing

VSI Crusher ensures product quality and specification to meet the Industry standards for combined Flakiness and Elongation Index, its also an ideal machine to manufacture Sand, which can be washed and segregated by our Mechanical Air Separator / Ecutec Turbine Classifier to remove unwanted micro-fines.

Grinding, Drying & Classification Systems

In Joint Venture with world leaders, ALLGAIER, company offer drying process based on Fluidized bed system and “MOZER system” rotating Drum Dryers. This includes complete solutions that represent combination of various drying processes as well as  granulating and screening system. IC offers complete grinding Mill systems designed  to pulverize and classify various kinds of materials including non- metallic  Minerals, fertilizers, chemicals, etc. Application covers stones , waste / recycling, chemicals, food , mining(Coal/Ore), metallurgy, Plastics ,Pharmaceuticals etc.

Manufacture and Supply of Specialized Bulk Material Handling Equipment

Specialized Bulk Material Handling for intelligent solutions to suit even difficult to handle materials. They are categorized in particular by high economy proven under harsh service conditions and are environment friendly. The range of equipment covers  Paddle Feeders(Slot Bin Extractors), Girdle Pocket Elevators, Spiralling  Belt Elevators, Scooping Belt  Conveyors, Belt and Pan Conveyors.



Business Outlook :
In last few years, there was steady increase in cost of raw materials and the increasingly unfavorable exchange rate, which used to be an issue of concern, the company has recognized this situation and has made efforts to minimize the impact of this on the business and performance for the future years. The company is now in comfortable position due to falling input prices, which are at multi year lows and stable exchange rate, thanks to the RBI.

In recent years to facilitate smooth recovery of sales proceeds, the company has adopted various recovery measures and th debtor management system have resulted in improvement in the liquidity position of the company.

The comfortable liquidity position arising out of retained earnings over the preceding few years has enabled the Company to meet all its capital expenditure out of internal generation. The surplus remaining after meeting the capital expenditure has been kept invested partly in Fixed Maturity Plans (F.M.P.) and partly in Fixed Deposit Schemes for short periods with various banks/finance Companies/ mutual funds.

The business environment has started showing certain improvement and company expects that the business environment will improve further during the current year. Joint Venture with Allgaier Werke GmbH, Germany for Mozer Type Rotary Dryers and Coolers has been formed during the year FY 14 and capital investment has been made by the Company for manufacture of these Dryers at Nagpur Plant and Company expect these hi-tech equipment and systems to make substantial contribution to the performance of the Company in the current and the future years.

The current average blended capacity utilization runs at around 50-55% and thus, the company can easily manage a turnover of Rs.200-230 crores with the existing capacities on a single shift basis.
The market demand for the products of Gear Box and Geared Motor Division has been increasing steadily during the last few years and the capacity enhancement undertaken by the Company in the recent past is expected to support the business growth in this area.


: This BSE Listed DEBT FREE business (FV Rs 10 paid up) at CMP of Rs 221 (Book Value Of Rs 392 per Share) is getting at close to 50% discount to its Book Value, is available at market cap of just Rs 55 Cr, Mcap to Sales ratio of 0.5 (Sales of close to 100 Cr in FY 14), Even in bad economic conditions, the company has paid dividend of Rs 5 per share, which is now reduced to Rs 1.5 per share due to capex.

The financial position of the company is very strong. It has very low equity of Rs 2.5 crore, of which 53% is held by promoters. Its Reserve & Surplus is 91 Crore against market cap of 55 Crore. Company also has Land & Buildings (factory & offices) which was acquired decades back, the value of which should be several times at current price.Nett block is at 29 cr as on 31-3-2014. Investment in Mutual Funds is 22 cr, 4.85 cr in FDs and Bank Balance.

The company is DEBT FREE and its spare land at Kolkata is nearly worth Rs 50 Crore (Rs 200 Per Share, means we are getting this debt free capital goods business almost at NIL Valuation) if monetized by the company.

As government is serious to provide Power 24x7 with the help of Locally Mined Coal, this has lead to coal block re-allocation at a faster pace, coupled with turn around in capital goods sector cycle, Being a Licensed Partnership with Global Leaders, this company is fully equipped with its products to take full benefit of Mining orders inflow.

With “Make In India” initiative, International Combustion to remain preferred choice of its International Partners for out sourcing their manufacturing activities from India.

 With big investors paying huge premiums for companies like Elecon, Eimco , which had good run up in last few months, this company cannot remain hidden for long time, as it caters to the entire range of high growth Infra Sector, Road Building, Mining Sector and Capital Goods Sector.

Can target 400 in the near term. 

TOP 5 INVESTMENT BASICS BOOKS

Which are the books we would recommend unhesitatingly to beginner investors, and perhaps in what order?

I am recording my top 5 beginner investor books. Please pitch in with your favourites with brief comments, so we can all take quick decisions to enrich our reading lists! Beginner investors will perhaps benefit the most, if we do a good job of this, but am sure all of us will be the richer for it.

1. Five Rules for Successful Investing, Pat Dorsey

I wish this book was the first on my reading list. If you want a practical do-it-yourself, step by step tutorial on how to analyse/research a stock in-depth, this is a no contest, hands down winner! My learning curve shot up tremendously after I read this book. By following Pat Dorsey's framework and applying it diligently (took me a month) I

Earlier my investment arguments could not/did not hold the attention of seniors. They would usually pick this or the other hole. That's because I lacked a holistic framework. Suddenly I was talking to them at their level; could hold a meaningful discussion. A big jump for me!

2008: Recommended by Subhankar Ghose, Kolkata; remain eternally grateful

2. Intelligent Investor, Ben Graham

Fascinating first read for me, loved the depth of this book.

Important concepts like "Margin of Safety" and "Mr Market" got driven home. Learnt how to AVOID the usual mistakes!!

2005: I started out with this one and the Peter Lynch book, in tandem.

3. One up on Wall Street, Peter Lynch

This one made investing look so easy. One really didn't need to be a hot-shot analyst to spot winners!

2005: I learnt that it is very much possible to find success on the street, if we keep our eyes and ears open (where are the crowds). ICICI Bank, HDFC Bank and Amalgamated Beans (Cafe Coffee day parent) interested me, as a complete newcomer like me tried to apply the Lynch principles. Bought and read along with Intelligent Investor.

4. Common Stocks Uncommon Profits, Phil Fischer

Got some insights into how to separate the wheat from the chaff! The novice got really interested in identifying probable multibagger candidates:)

Found it real hard to apply! Nevertheless the book is a fascinating read, and my interest in identifying excellent businesses got kindled.


5. The future for Investors, Jeremy Siegel

Regular Dividend Re-Investment and staying Invested a in consumer-facing branded Pharmaceutical, FMCG and Tobacco companies has proven to be the best Long-Term Investment strategy of all-time, revealed Prof. Jeremy Siegel's outstanding research for the US market.

7 things to know about MAT tax notices to FIIs

The benchmark Sensex fell nearly 1500 points or 5% since the Union Budget presentation on February 28, 2015. This is a major fall considering the Indian market's bullish streak in the past one year.
A key reason for this is the issue about Minimum Alternative Tax (MAT), which has worried foreign investors for some time now. FIIs are one of the biggest players in the Indian market. So, their stock trading affects the overall market directly. Worries about the MAT issue, however, have limited FII participation in the markets in the recent past, leading to the consistent fall.

Here we decode the matter for you in seven simple points:

Minimum Alternative Tax is an addition to the Income Tax, levied by tax authorities. It was introduced in 1997-98 to prevent companies from using loopholes and exemptions in the Income Tax Act to avoid paying tax. So, MAT acts as a threshold tax rate. Every company has to pay tax at this rate of 18% even if its effective tax rate is lower. However, there has been confusion over whether MAT is applicable for capital gains by foreign investors in the Indian markets.

Clarity finally came in the Budget speech, when Finance Minister Arun Jaitley announced that MAT would not be applicable for Foreign Portfolio Investors (FPIs). This means, foreign investors need not pay 18% tax on their book profits even if they do not have any taxable income as per IT Act. This was to be applicable from April 2015 onwards.

The announcement about applicability from April 2015 opened the can of worms. This is because tax officials interpreted that since the MAT exemption applies only from April 2015, investors had to pay MAT in the previous years. They had originally not levied the tax on investors because of the initial ambiguity.

Tax officials then sent tax notices to over 100 foreign investors for the three years preceding 2015. They have demanded for tax payments, which amount to nearly Rs 40,000 crore, according to media reports. Some reports suggest that this figure could rise up to Rs 63,000 or $10 billion as more cases are unearthed. Since the tax notice applies to years gone by, it makes the tax rule 'retrospective'. At a time when the government is trying to simplify tax rules and avoid any retrospective taxation, this issue plays spoilsport.

The finance ministry has been called to clarify the tax rule. The government said that MAT would not be applicable for investors trading from countries which have tax agreements like DTAA with India. DTAA stands for Double Taxation Avoidance Agreements. This includes 85 countries like Mauritius, Australia, Indonesia and US.

This has come as a relief to FIIs, but only some of them. The rest, who trade from other countries, would not enjoy the tax exemption. They will have to approach the Supreme Court, the government said. The matter is now sub-judice. It now depends on the Supreme Court to decide if FIIs will indeed have to pay billions of dollars of tax. However, the matter is not proceeding as fast as hoped. There is no clarity on a date for the court hearing.

Meanwhile, FIIs have limited their participation in the stock markets. This has worried many domestic investors too, who expect a major fall in case the FIIs start selling because of the issue. Such a volatile situation may continue until the SC hears the case. However, this issue only affects short-term capital gains. So, foreign investors who invest for the long term are unaffected. They may continue to trade in the Indian markets, which has been preferred over other emerging countries in the recent past.

MAT row: Foreign investors to get tax treaty shield on tax demands

The Short Answer: India's Minimum Alternate Tax

Invest in Bitcoins - Very Strong potential Multibaggers

BITCOIN
ETHEREUM
LITECOIN

Camlin Fine sciences: Good potential Multibagger

Much like the surge in demand led to growth in the steel industry in the 19th century, the growing demand for processed food is creating larger opportunities in food protection business. At the heart of food protection business, is food preservation and shelf life extension. Food protection is a complex business encompassing elements of basic chemistry, food chemistry, bio-chemistry and bio-technology.



Camlin Fine Chemicals Ltd was originally incorporated on November 30, 1993 as a private limited company with the name of Camlicon Consultants Pvt Ltd. In April 2006, the main object of the company was altered to enable the company to pursue business in Fine Chemicals.


The company has a strong research and development which is focused on bringing in continual improvements on process and products, backward integration and developing innovative products. The research and development is equipped with comprehensive and updated instrumentation for conducting quality analysis, stability studies. The research and development also is equipped to conduct application studies on stability index of edible oils and Bio-diesel. They launched a new product namely, 'Sucralose' which is a synthetic sweetener with large demand and attractive price.



Camlin Fine Chemicals Ltd is one of the India's leading manufacturers and exporters of Bulk Drugs, Fine Chemicals and Food Grade products. The company manufactures active pharmaceutical ingredients (API's), food antioxidants and sweeteners. They operate in two business divisions, namely Food Ingredients Division and Industrial products Division. The company's products have applications in processed foods, edible oils, paints, polymers, alternative fuels (biodiesel), rubber, health, and pharmaceuticals.



The Company during the financial year under review  has  registered a growth in sales at 19%. further, the Company was successful in holding on to the market share in major  markets and also registered a growth in emerging markets like South America and Asia by extensive customer reach through its sales teams. This growth has been achieved in spite of recessionary pressures in the international market during the year. The growth of the Company is also powered by new and value added products. The Company has increased its market share by 3 highly potential new products from the diphenol down stream as per planned strategy. These products were Tertiary Butyl Catechol (TBC), Guaiacol and Veratrole which has contributed to the growth.

The Company has expanded its sales team in Latin America, India and China to increase customer reach and penetration in the markets. The Company  will be shortly establishing an office and distribution hub to improve the service and shorten supply time to customers, in Latin America and China. The Company will also be shortly appointing sales managers in Middle East and Asia to further widen and improve the wider customer base.

In line with the overall growth objective and strengthening of infrastructure base, the Company had invested in Information Technology (IT) viz. SAP Enterprising Resource Planning system for leveraging its business values. Through implementation of SAP the Company has improved its operational efficiencies, inventory minimisation and cost  optimization not only for its Indian operations but also in its overseas manufacturing operations at Italy

Gross sales during the year ended 31st March, 2014 were higher at ` 38,289.10 Lacs as against ` 32,276.48 Lacs in the previous year. This is an increase of ` 6,012.62 Lacs in sales over the previous year registering a growth of 18.62%. Profit before tax was ` 2,920.58 Lacs as against 2,252.77 Lacs showing an increase of ` 667.81 Lacs over the previous year registering a growth of 29.64%

The products manufactured  by Camlin Fine Science Ltd. are unique and company has good market share. With changing lifestyle and urbanization, market demand for ready-to-eat or packed goods are on the rise. This should augur well for domestic demand growth.  Camlin Fine Science Ltd., is indeed a good business to own. For the profits it is expected to post, the stock deserves a better valuation in the short term. 

VRL Logistics: Potential Multibagger / IPO Note

VRL Logistics Ltd (VRL) is one of the leading pan-India surface logistics service providers of goods and passenger transportation. The company receives 75% of the revenue from road transportation business, 20% from bus operations and 5% from air chartering services and sale of power. The company owns the largest fleet of commercial vehicles in private sector in India and has got pan-India presence in goods transportation, while bus operations are concentrated in Southern and Western regions of India. Considering its past financial performance and promising growth outlook in road transportation business, I believe the IPO is attractively priced and hence we recommend SUBSCRIBE to the issue.

The promoter, Dr. Vijay Sankeshwar set up transportation business in 1976 with one truck and today the company owns 3,546 vehicles. The variety of goods transportation vehicles in its fleet enables it to serve diverse mix of consignments. Also, ~30% of the vehicles are less than 5 years of age and through IPO proceeds the company plans to buy another 248 transport vehicles.

Apart from goods transport business, the company, under the brand name “VRL” provides luxury bus services across the states of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. It provides ticket booking facilities through various leading websites.

During the period FY10-14, revenue has grown at a CAGR of 20.4% from Rs7,113mn to Rs14,938mn while PAT has grown at a CAGR of 18.7% from Rs287mn to Rs570mn. The company faced relatively lower growth and reduction in margins during FY13 and FY14 owing to the Telangana issue and rapid rise in diesel prices. However, during 9MFY15 the company’s gross margins bounced back to previous levels of ~30% thereby improving the PAT margins.

Key Investment highlights

• Company will benefit from growing demand of high margin LTL (Less-than Truck Load) business due to its large scale and wider reach
• Focus on in-house development of software, maintenance facility and vehicle body design facilities help to maintain operating efficiency in business
• Strong clientele relationship with diversified base.

Key Financials Rs.mm	FY12	FY13	FY14	9MFY15
Total Operating income	11,304	13,255	14,938	12,738
Growth %	27.2	17.3	12.7
EBITDA	1,919	1,952	2,066	2,195
Margin %	17.0	14.7	13.8	17.2
Net Profit	767	457	570	717
Growth %	48.5	(40.4)	24.7
Diluted EPS Rs	8.4	5.0	6.2	7.8

Risk factors

• Rapid rise in diesel prices may impact margins.
• Slowdown in business could impact margins due to high fixed cost nature of operations.

Key Investment Highlights

Company will benefit from growing demand of high margin LTL (Less-than Truck Load) business due to its large scale and wider reach Unlike FTL (Full Truck Load) operations, wherein consignment originates from a single source, LTL arrangement requires wider reach and adequate infrastructure. Under the LTL operations, the service provider aggregates consignments from various clients and sends them across to the desired destination. The India-wide network of collection and delivery points and its strategically located transhipment hubs have enabled the company to focus on the attractive LTL business. The LTL service offers higher rates per load compared to the full truck load (FTL) service as it involves consolidation and transportation of freight from numerous customers to multiple destinations and, thus, generates higher net revenue per vehicle. This has helped the company record better profitability compared with other big organised players who largely focus on the FTL business.

As per industry sources, non-bulk traffic, which essentially operates on LTL arrangement is expected to grow at 8-10% CAGR over FY14-19E, as consumption demand for consumer durables, pharmaceutical products and automobiles improves. Accordingly, the share of non-bulk segment in the overall primary freight traffic is expected to increase to 57-58% by 2018-19 from 47-48% in 2008-09. Focus on in-house development of software, maintenance facility and vehicle body design facilities helps to maintain operating efficiency in business and differentiates from peers VRL has developed in-house software technology capabilities, which enables all its offices, transhipment hubs, branches and agencies connect to central information network through an ERP system, facilitating real time monitoring of operations and tracking of consignments.

The company has a dedicated workshop facility in Hubballi, Karnataka with several satellite workshops in strategic locations across India. This has enabled the company to enter into spare parts supply arrangement with Ashok Leyland and VE Commercial Vehicles Ltd at competitive rates and reduce procurement timelines. It also has a tyre repair unit to increase the useful life of tyres. Additionally, the in-house vehicle body design facility at Hubballi, Karnataka aids in fabricating vehicles with lighter and longer bodies to carry higher payload resulting in increased margins per vehicle. Apart from the above in-house developments, the company’s engineering division has resorted to various innovations, which has led to cost savings and efficiency in operations. Strong clientele relationship with diversified base; Growth of e-commerce business will aid higher revenue growth.

The company has long standing relationship with its clients and has diverse mix of customers in the FMCG industry as well as in general commodities such as food, textiles, apparel, furniture, appliances, pharmaceuticals products, rubber, plastics, metal and metal products, wood, glass, automotive parts and machinery. Additionally, it also serves its clients in e-commerce business, which is a high growth sector. Government’s focus on development of road infrastructure and implementation of GST and Transport bill will increase and smoothen road transport: Government’s focus on overall road infrastructure development with special focus on eastern part of India, where VRL has relatively weak presence, will help the company to grow its business in this part of the country. The proposed implementation of GST in India is expected to remove the current multiple taxation effect of Octroi, CST, VAT, Entry tax, etc. Therefore, implementation of GST along with Transport Bill would benefit the logistics sector, particularly in terms of increased efficiencies.

Risk & Concerns 

Rapid rise in diesel prices may impact margins 

Fuel cost is the single largest input cost at ~28% of the company’s revenue. So any rapid rise in diesel prices (in deregulated environment) is difficult to pass on to the clients as company is able to change price only on periodic basis. In the past, VRL has been able to pass on the incremental cost to the customers and has maintained the operating margins except in FY13 and FY14 where margins took a dip due to rapid price rise in diesel. 

Slowdown in business could impact margins due to high fixed cost nature of operations 

The transportation industry is cyclical in nature and susceptible to trends in economic activity. VRL operates an asset-heavy business model and this makes it difficult for it to pass on the incremental cost to the customers in case of an economic downturn. This could impact margins of the company due to high fixed cost nature.

Outlook and Valuation

In India, freight is transported across the country mainly through roadways, railways, coastal mode and pipelines. In recent years, the accessibility, door-to door service and reliability have earned road transportation a higher share of passenger and freight traffic vis-à-vis other transport modes. Share of freight transported through road is estimated to have increased by 8.5% in the last decade to about 63% in 2013-14. During the same period, the share of railways is estimated to have decreased by 7% to 27.4% in 2013-14.

VRL has been in existence in the road transport business for the last 40 years and is one of the largest in terms of fleet size with pan-India presence across the country. Owing to this, it is well placed to benefit from the growing demand of LTL (Less than Truck Load) arrangement. The company has also resorted to various in-house development of software, maintenance and body design facility, which has helped it to increase its efficiency.

During the period FY10-14, revenue has grown at a CAGR of 20.4% from Rs7,113mn to Rs14,938mn, while PAT has grown at a CAGR of 18.7% from Rs287mn to Rs570mn.The company faced relatively lower growth and reduction in margins during FY13 and FY14 owing to the Telangana issue and rapid rise in diesel prices. However, with Telangana issue sorted, the company’s performance during the 9MFY15 has improved and gross margins have bounced back to 29.5% compared to 27% in FY14 thereby improving its PAT margins to 5.6% from 3.8% in FY14. Additionally, the company earns high cash flow from operations and debt equity (post issue) will come down to comfortable levels from current 1.1x.

At the upper band of issue price of Rs205, the IPO is valued at P/E of 19.5x FY15 annualized earnings. I believe, P/E multiple of 19.5x with an RoE of 18-19% and positive growth outlook of 15-20% over the next 2-3 years provides healthy upside from upper price band. In this backdrop, I recommend SUBSCRIBE on VRL Logistics IPO.

Key Financials Rs.mm	FY12	FY13	FY14	9MFY15
Total Operating income	11,304	13,255	14,938	12,738
Other Income	49	98	100	56
Total Income	11,353	13,353	15,038	12,794
Total Expenditure	9,385	11,303	12,872	10,599
Operating Expense	7,911	9,626	10,912	8,991
Employee Costs	1,289	1,483	1,745	1,457
Other Expenses	184	194	216	151
EBITDA	1,919	1,952	2,066	2,195
Depreciation	696	823	866	692
Finance Cost	651	591	598	450
Exceptional Cost	0	0	66	0
PBT	621	636	768	1,053
Tax	(147)	179	198	336
Pat	767	457	570	717

Balance Sheet	FY12	FY13	FY14	9MFY15
Source of Funds
Equity Share Capital	707	1,812	855	855
Reserve & Surplus	1,166	1,082	2,208	2,513
Shareholder’s Funds	1,873	2,894	3,064	3,368
Deferred Tax (net)	692	776	834	832
Long Term borrowings	4,035	2,852	2,529	2,131
Other liabilities (long)	78	87	89	89
Long Term Provisions	22	29	26	49
Current Liabilities	2,623	3,014	3,235	3,260
Short Term borrowings	729	938	1,094	1,045
Trade Payable	56	50	93	64
Other Current Liabilities	1,761	1,655	1,825	2,054
Provisions (Short)	77	371	223	97
Total Liabilities	9,323	9,652	9,777	9,729
Application of Funds
Fixed Assets	7,064	7,243	7,544	7,091
Investments	1.3	0.8	1.1	1.0
Loans & Advances	917	967	907	819
Current Assets	12	7	25	25
Current Investments	1,347	1,434	1,299	1,792
Inventories	87	97	135	167
Trade Receivables	785	854	800	883
Cash	136	154	151	130
Loans & Advance (Short)	151	185	198	259
Current Assets (Other)	187	143	16	353
Total Assets	9,323	9,652	9,777	9,729

Issue Details

Issue Details
Issue Size	22.8
Issue Open/Close	April 15/17 2015
Face Value	10
Price Band	195-205
Lot Size	65
Pre Issue paid up capital (Rs.mm)	855
Post Issue paid up capital (Rs.mm)	912
Post Issue Market Capital (Rs.mn))	18,705
BRLM	ICICI Securities and HSBC
Registrar	Karvy
Pre Issue Pattern	%
Promoter	77.2
Public	22.8
Post Issue Pattern	%
Promoter	69.6
Public	30.4
Offer for different categories	%
QIB	50
HNI	15
Retail	35
Promoters	Dr.Vijay Sankeshwar Mr.Anand Sankeshwar