AI

About a year ago, we analysed the valuation of India’s small and mid-cap indices to determine whether they were attractive for purchase by investors (see post below). Our analysis revealed that the indices appeared undervalued by historical standards. We decided to have another look at the current valuations of the indices to recap performance and determine the price attractiveness today. When we wrote our post last year, the small-cap index closed out at the level of 5,550.14. The closing level today is 7,006.73 – resulting in a gain of over 26% in a little over a year. So, how does this level stack up against the basic fundamental metrics of the underlying businesses?  Here’s a summary of the valuations sourced from the BSE website: Table 1: Annual valuations (2006 to 2012) Year High Low Close Price/ Book value 2006     7,872.80    4,480.45     6,892.32            2.05 2007  13,376.80    6,001.33  13,348.37            2.78 2008  14,239.24    3,221.70     3,683.11            2.13 2009     8,425.57    2,864.24     8,357.62            1.49 2010  11,366.68    7,926.82     9,670.31            2.39 2011     9,920.58    5,460.31     5,550.14            1.84 2012     7,525.68    5,540.30     7,379.94            1.29 Median            2.05
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By AI IFB Agro Industries is in the business of producing alcohol (70% to 75% of revenues) and marine products. The company is based out of the state of West Bengal (WB), which is well known for its regressive attitudes towards businesses. In the alcohol segment, it distributes ‘Volga’ vodka, ‘Jubilation’ rum, ‘Benjamin’ brandy (latter two launched recently).  Demand in the Indian Made Foreign Liquor (IMFL) appears to have a promising outlook with growth estimated at about 20% per annum.  It has also installed a new plant to enhance its country liquor production capacity since demand was outstripping supply – however, licenses weren’t granted by the state as at the end of last year. In the marine segment, it distributes frozen marine products in the major metros through retail chains under the “IFB Royal” brand.  It also has a 48% market share in the shrimp feed trading business.  It had recently enhanced capacities in the marine division including new IQF machines and cold room facilities. The company has reported somewhat erratic overall profitability during the last five years on a growing revenue base – reporting a record high of 50cr in operating profits on revenues of almost 600cr in the last financial year.  It
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  By AI Chemfab Alkalies operates in the heavy chemicals industry and is in the business of manufacturing Chlor Alkali products. It primarily manufactures Caustic Soda Lye, comprising about 75% of revenues, which is used in various basic industries such as paper, aluminium, textiles, etc. It also produces chlorine (comprising 12%-13% of revenues), hydrogen, sodium hypo chlorate, and hydro chloric acid – also finding applications in various manufacturing industries. The company reported reasonably stable (albeit somewhat declining) operating profits and revenues in the last five years – reporting about 16cr in operating profits on revenues of 77cr in the last financial year. It held cash and liquid assets of over 27cr as at 31st March, 2012 The business is very cyclical – dependent not only on international demand fluctuations (primarily from aluminium manufacturers) arising from global economic cycles but also global oversupply in its own industry arising from capacity additions by competitors. For e.g., the company operated only at 75-80% capacity in the previous year when excess supply was not fully absorbed by demand. This situation results in dampening of selling prices. The business is exposed to increases in energy as well as raw material costs. This is usually passed through
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  IFB Agro Industries is in the business of producing alcohol (70% to 75% of revenues) and marine products. The company is based out of the state of West Bengal (WB), which is well known for its regressive attitudes towards businesses. In the alcohol segment, it distributes ‘Volga’ vodka, ‘Jubilation’ rum, ‘Benjamin’ brandy (latter two launched recently). Demand in the Indian Made Foreign Liquor (IMFL) appears to have a promising outlook with growth estimated at about 20% per annum. It has also installed a new plant to enhance its country liquor production capacity since demand was outstripping supply – however, licenses weren’t granted by the state as at the end of last year. In the marine segment, it distributes frozen marine products in the major metros through retail chains under the “IFB Royal” brand. It also has a 48% market share in the shrimp feed trading business. It had recently enhanced capacities in the marine division including new IQF machines and cold room facilities. The company has reported somewhat erratic overall profitability during the last five years on a growing revenue base – reporting a record high of 50cr in operating profits on revenues of almost 600cr in the last
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Salora International is engaged in the distribution, supply, and after-sales service of consumer electronics, IT, Telecom, televisions, and other products. It supplies products for brands such as Acer, Motorola, MTS, Sharp, etc. along with some Chinese manufacturers.  It also supplies televisions under its own brand name ‘Salora’. The company reported declining operating profits (now losses) on declining revenues over the last five years.  It reported net losses of 8cr on a revenue base of just over 400cr in the year ended 31stMarch, 2012.  Despite the losses, the debt load appeared moderate in relation to its current assets – assuming that its receivables and inventories were valued conservatively. The business is exposed to the interest rate cycle – with high rates adversely impacting both the servicing costs of the company’s debts and consumer demand i.e. those who finance purchases with loans. The business is also exposed to the considerable risk of technological obsolescence where products can be rapidly rendered out-of-date as a result of aggressive competitor innovations. The high level of competition in electronics retailing results in pressure on selling prices.  The cost structure is adversely impacted by inflation, government taxes, customer defaults (>50% of debtors exceed six months), and foreign
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Vejlan Denison manufactures engineered fluid power products such as hydraulic motors, pumps, valves, etc. that cater to the infrastructure, construction and other manufacturing industries. The company reported reasonably good growth in operating profits and revenues in the last five years – reporting over 20cr in operating profits on revenues of over 80cr in the year ended 31stMarch, 2012.  It operated with a very modest debt load as at the end of the last financial year. The demand for the company’s products is exposed to the infrastructure and construction cycles, which are linked to the economic cycles.  Therefore, being a relatively small player, its revenues are potentially exposed to disturbing declines during economic slowdowns. The company is subject to competition from both domestic and foreign competitors – who are both entering as well as expanding in the Indian market. The operations are adversely impacted by high steel/pig iron prices, which are the primary raw materials – and by unreliable supply of castings from vendors.  Moreover, it faces general cost increases in power, human resources, etc. resulting from inflation.  It is a net importer of machinery (albeit an infrequent one) as well as some raw materials – and is therefore adversely affected
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Sicagen is a trading outfit based out of Chennai. It is primarily engaged in trading commercial vehicles and construction materials.  It is a distributor for Tata Motors. It reported marginal operating profits on growing revenues over the last five years – reporting over 25cr in operating profits on revenues of 900cr in the year ended 31st March, 2012.  It operated with a moderate debt load relative to its current assets as at that date. The company reported 38cr in market value of quoted investments as at 2011 year-end – this would be lower as at 2012 year-end but not by too much. The reported assets on the balance sheet are largely comprised of sundry receivables and other loans and advances – their recoverability is unknown from publicly available information. The business is totally dependent on the interest-rate environment – being adversely exposed to high interest rates, crimping demand for its products. It is also impacted by the cyclical factors from the supply side – including those affecting the steel industry. Government regulations on fuel, duties, and taxes play a large role in impacting demand for the company’s automobiles. Being a trading outfit, the company is exposed to significant competition resulting in
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ABM Knowledgeware executes IT projects primarily for state governments. It primarily executes e-governance projects, which enjoys a virtuous circle when government departments see the results of successful implementation with their peers.  The company is currently operating in Maharashtra but plans to expand to other states. The company reported consistent growth in revenues and operating profits in the last five years – reporting over 20cr of operating profits on over 90cr of revenues in the last twelve months.  It operated with a net cash balance of just under 15cr as at 31st March, 2012. The primary risk facing the business is government apathy and/or spending cuts, which curtails projects and reduces revenues. The business also faces substantial risks in technology obsolescence in meeting client objectives, and acquiring and retaining skilled manpower at reasonable costs. Other risks include execution difficulties (leading to cost overruns), lack of citizen awareness (leading to lesser future projects), minimal of electricity, telephone and internet access for many citizens, lack of coordination/inefficiencies among various government departments (increasing execution costs), inflationary cost increases, etc. The company reported about 25cr in “long-term loans and advances”, which appear to be capital work-in-progress.  However, management haven’t provided details on this item, which is
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Haldyn Glass is in the business of manufacturing glass bottles for use in the liquor, pharmaceutical, retail, food and beverage, and other industries. The product is more hygienic and eco-friendly than substitutes. Management expects good growth in the customer industries – particularly liquor, which has grown at 12% p.a. in the recent past.  They are investing in advanced technologies and bottle-printing and decoration facilities to add value to its offerings to the food and beverage sector. The company reported good growth in revenues and operating profits in the last five years – reporting over 45cr in operating profits on revenues of about 175cr in the year ending 31st March, 2012.  It operated with minimal net debt as at that date. The company’s order book is dependent on the global and domestic economic cycles. The business requires investment in up to date technologies to remain competitive.  The product is largely a commodity and doesn’t appear to be differentiated in any significant manner. The cost structure is adversely impacted by natural gas price rises (for furnace) as well as increases in cullet, chemicals, minerals, etc. that are required for production. By: AI 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
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Frontier Springs manufactures coil and leaf springs. It is a market leader in this niche segment and supplies to prominent customers such as Indian railways, BHEL, BEML, etc. Moreover, Siemens Germany approved its manufacturing facilities for use in its switch gears production. Management aims to focus on exports to increase future profitability. The company reported growing operating profits on growing revenues in the last five years, although this has taken a slight dip in the last twelve months (see below) – with operating profits of over 5cr on revenues of over 35cr.  It operated with a modest net debt load as at 31st March, 2012. The business is largely dependent on the capital investment cycle for its revenues, which is adversely impacted by high interest rates (such as now). It is also exposed to increasing costs of steel, its primary raw material.  This is, in turn, dependent on the global steel demand/supply scenario.  Management is attempting to enter long-term supply contracts with vendors to mitigate this risk. Further, there has been an increase in competition, which is putting downward pressure on selling prices.  Its easing would depend on the quality of the company’s products/services as well as demand growth and the
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Mafatlal Industries operates in the textile industry engaging in spinning, weaving, and processing of textiles. The company was de-registered from BIFR in 2011 as a result of restoring its net worth and paying down debts.  It did this by selling one of its properties to the Piramal Group for 600cr and using the proceeds to pay off outstanding debt. The balance sheet revealed a much more comfortable debt position as at the end of the last financial year as compared to the year before. Management now plans to incur capital expenditures of 65cr for enhancing processing capacities along with 10cr for power generation.  They also intend to raise additional bank loans to finance these capital expenditures. The company reported large operating losses in nine out of the last ten years – enough to wipe out equity and then some – landing it with the BIFR.  Apparently, it is stuck with old equipment and high labour costs.  This isn’t helped by aggressive competition from low-cost domestic and foreign competitors.  The weaving/processing segments are fragmented and comprised of a large number of competitors. Further, the industry suffers from below-par growth of 3 to 5% p.a. relative to other industries.  Therefore, demand growth
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