Archive for October, 2007

The deal's at 30.9 million euros, for a 100% equity stake. The deal also makes Sintex absord the 11 million euro debt that the company has, meaning the net investment is around 42 million euros (the loan has to be paid back!)

Nief makes stuff for a lot of very famous European brands, like Thryssenkrupp, Areva, Alstom, Renault etc. Not just that, Nief has manufacturing facilities in Eastern Europe and Africa, giving Sintex the ability to deliver faster in these markets.

Nief makes about 110 million euros in revenues, and EBIDTA is about 10-15 million euros. They must make about 7-10 million euros post interest and tax, making the deal about 5-6 P/E, which is reasonable.

Where's the money coming from? 31 million euros is about 160 cr. which they can easily finance; their March 07 Cash flow statement shows over 574 cr. in cash. This is great, because a) they don't need to take on debt for this acquisition and b) they can use the surplus cash.

You usually take P/E to value a company, and that is entirely based on earnings. Cash in the bank does not yield much in terms of earnings so that is usually not accounted for; when a company uses its cash to expand the business, it can yield much more than an equivalent bank deposit yield. In this case, let's assume Nief makes 7 million euros in net profit = about 35 crores. (this is post tax, interest and all that) So Sintex has effectively invested 160 cr. of its cash, to get 35 cr. return per year, which is a 20%+ return, much more than it would have got for the money had it sat in a bank account or debt mutual fund.

The impact on financials: Sintex should make around 160 cr. this year, EPS being around the 14 Rs. mark. An additional 35 crores will bump up EPS by about Rs. 3 (maybe not fully this year but still), and in toto the EPS should be around 17 - not accounting for a very small Bright Brothers acquisition earlier this year. Even for an EPS of 15 the growth is around 40%, and with the current price is around Rs. 460 the P/E is around 30. Synergies will increase earnings, and I believe the stock will go up.

Disclosure: They announced this as an "impending acquisition" when they announced their results two weeks back and I bought some of their shares at Rs. 370. It's now 460, and I purchased some more when they announced the acquisition yesterday, at 445. I am long on this stock. Also, this is not a recommendation to buy or a solicitation for this stock; this is only my opinion.

Against total sales of around Rs. 64 crore in the full year, the year-end debtors stand at over Rs71 crore! And the balance sheet says that debtors’ outstanding for less than six months is Rs49 crore. Interestingly, by seeking its quarterly results for the full year, I find that in the last two quarters of the year, Bartronics had notched up sales of Rs35 crore. Against total sales of Rs35 crore in six months to March 07, the company’s debtors’ outstanding for less than six months is Rs49 crore. Funny arithmetic indeed!

Balakrishnan perhaps saw a misprint because the capital allocation is quite clear in the link above. There are 8 lakh stock options, 46 lakh promoter warrants (at 130) and 32.5 lakh institutional warrants (at 110). A total of 87 lakh shares will be added to the current 1.78 crore, meaning real outstanding shares are considered to be 2.65 crore (or will be as of Dec 2008). That brings the EPS for the FY down to 5.54.

One other problem: They mention that they didn't spend anything on R&D in the year, but also admit that they must do research in order to be competitive. Uhm.

The stock's done well, and it's been some fantastic momentum. I think management should answer these questions (I will mail them myself) - if not, this is a bubble stock. To its credit, there is a new smart card facility coming up. And the first Q 2007 results have been very good, up nearly 100% year on year. So while it doesn't look overvalued to me, it's not exactly cheap either.

But be careful, if you own this share. The financials don't quite seem to add up.

Reliance Industries is growing at 30-40% on EPS. It's being given a forward P/E of 25. This is not considering that it's sitting on a pile of cash, and is also growing inorganically, and has an unvalued reliance retail, a majority stake in RPL and RPL is worth 78000 cr. , building huge coke gasification and paraxylene plants of the size no one else has in the world, and of course it has all the gas finds, the SEZs and all that. Throw out all of that stuff, and we still have a growth rate of 30-40% this quarter, and forward P/E is 25.

This is one of India's largest companies by turnover. They make more revenues than Infy, TCS, Wipro, and Satyam ADDED UP, quarterly. And they have recently grown faster on profits than all of these companies.

Take this quarter. They have a P/E of 26, which is consolidated with IPCL. This is not including an unrecorded forex gain of Rs. 515 cr. (which other companies like Tata Steel and Airtel are recording) which is about Rs. 4 per diluted share. Let's just take Rs. 2 of that for this quarter. That's a total of Rs. 28 earnings per share. If you take Q2 last year and consolidate with IPCL, you get an EPS of 19 for RIL and 2.5 for IPCL (12.4 is IPCL's EPS, but divide by 5 since the merger was 5:1) That's 21.5 last year. About 33% growth on EPS. Going forward they are close to an EPS of about Rs. 100 on the year. The price is 2,500. P/E? 25.

They call that expensive? Note that we are paying Infy a P/E of 25 forward, on a growth rate of 20% and even their one year guidance is only 20% growth. They are EXPECTED to earn Rs. 79.9 (the highest end of their guidance) per share. Last year they did Rs. 67 or so. The growth rate? Less than 20%. At current price of Rs. 1900, that's a P/E of 23.

I have heard a lot of things about Reliance and the promoters. But they have created more shareholder wealth in the last five years (and earlier too but ditch that for now) than most other companies. In fact if you had bought one share of Reliance pre-brother-split in 2005, you would have paid Rs. 800 or so, and got one share of Reliance, one RNRL, one RCOM, and some parts of REL and Reliance Capital. The net value of these shares today is around Rs. 4,000, a five fold increase in less than three years.

And this is India's most valuable company, by market cap. The biggest company in India grows your money 5 fold in 3 years. Very few in the top 10 can claim to do so - closest perhaps is Airtel, and that's valued at, let's see, a p/e of 40+.

Yes, today people say RIL it's "overvalued". But have they considered that all this time, it has just been undervalued severely? They gave it a P/E of 15 when it grew at twice that rate. Today it's doubled and the P/E is still lower than its forward growth rate. And it's expensive because it's doubled in value?

I know that Reliance will participate just as much in a crash as anyone else. Yet, they are the guys you want to buy, because from here downwards, they are more valuable than most other large caps.

Let's also look a little bit at RPL, Reliance Petroleum Limited. People say it's WILDLY overvalued for a company that hasn't even started production yet.

It's coming up on schedule in Dec 2008. (Reliance has have said it's earlier than schedule, but ditch that, let's say it comes on schedule). It will process 580,000 barrels per day of heavy crude. Reliance Industries does about the same ammount, actually RIL does about 40,000 barrels a day less than RPL. But let's assume similar margins for the RPL businesses and work it out. The half yearly (net) profit of reliance on the refining segment as of Q2, 2008 was about 3859 cr. as gleaned from the quarterly report. Multiply that by 2 to get annual figures you get about 7700 cr.

Now if RPL can do exactly that, it earns an EPS of about Rs. 17.1 per share.

Now if we add the 0.9 million ton polypropylene plant in RPL, with current margins, the EPS may square off at around Rs. 20 per share.

The current value of RPL is around 170, which is pretty reasonable for what is effectively one of the world's largest refineries. Perhaps a little higher can be given for higher margins (with a stabilised dollar, margins will be higher than now) and the fact that the project is a little ahead of schedule. So it's not "over" valued, it's perhaps got to a reasonable valuation as of current market pricing. It will get re-rated as refinery margins change and heavy-light crude differential (currently $5) changes.

Hope that helps. Value is obviously a very difficult thing, but I present my simplistic view. Please feel free to correct me if I'm wrong.

Disclosure: I am long RIL and RPL.