Monthly Archives: March 2014

Seamec – The Deep Ocean Hunter

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Seamec Ltd, a service provider of Diving Support Vessels (DSV), 75% owned by a Technip SA (french company with Euro 8 bi revenues, 36000 employees involved in the project management, engineering and construction of energy sector installations) has seen a huge spurt in volumes today (19/3/2014) and has hit the upper circuit. I have been curious about this company for a long time and was waiting for a trigger before entering the script. Today`s spurt in volumes seems to be the tipping point.

THE BUSINESS

The company owns and operates 5 vessels which are chartered by big oil companies who in-turn use them for a variety of offshore activities. The company had a golden year in 2009-10 (at the height of the oil boom) during which revenues reached Rs 425 Crs and PAT reached Rs 208 Crs. In the next 2 years, the company recorded losses of Rs 64 Crs and Rs 6 Crs. It was only in 2012-13 that the company got back into the green and was able to record Rs 34 Crs of PAT (on revenues of Rs 360 Crs). The company currently holds Rs 100 Crs of cash and is debt free.

MANAGEMENT

75% of the company is held by Coflexip Stena Offshore (Mauritius), which in-turn is a subsidiary of Technip SA. Seamec has paid out Rs 2 Crs and Rs 3.5 Crs as Management fees to the parent company for FY 13 and 12. Managing Director Christopher J Rodricks has been with the company since 2003 and takes home a salary of Rs 2.6 Crs (since this amount is in excess of the allowable limit, the company has taken this issue to the Ministry of Corporate Affairs and Government of India).

THE TRIGGERS

http://www.moneycontrol.com/news/stocks-views/see-20-upsideseamec-this-week-sp-tulsian_1040643.html

Mr Tulsian has been tracking the company for quite sometime and has mentioned in the above link that the promoters are looking to sell stake. Although I am unable to get any original weblinks which prove this (promoters wanting to sell stake), the above is just one of the factors that is pushing me to buy and recommend this stock.

The company has made a healthy profit of Rs 30 Crs in Dec 2013, but for the nine months of 2013-14, the company is still in the red by Rs (29) Crs.

http://www.majorgainz.com/news/company/companyDetail/11-02-2014/Seamec_sees_better_oveseas_biz_pricing_eyes_spending_cuts.aspx

The Managing Director seems mildly optimistic that vessel utilization will continue to remain healthy for Q4 2013-14. If we can take this optimism at face value, then we may expect the company to breakeven (no profit no loss) in 2013-14.

http://www.thestatesman.net/news/45154-goldman-upgrades-equities.html

http://in.reuters.com/article/2014/03/18/goldman-sachs-upgrades-indian-shares-to-idINDEEA2H03Q20140318

Enter Goldman. Is this one of the triggers? Maybe. Goldman mentions being overweight on Energy stocks, ONGC and cyclicals. Seamec`s vessels are sub-contracted by ONGC and Seamec`s earnings are very lumpy (read cyclical).

FII`s, as of date, are very bullish on the Indian markets (which I find to be irrational and overoptimistic). Seamec is a Zero debt company with a strong promoter profile (multinational giant). As of March 2013, FII`s only held 2.12% of Seamec. If only Seamec`s earnings were better, the company would be trading at substantially better valuations.

DO THE DOTS CONNECT. AM I GETTING THE BIG PICTURE RIGHT ?

Frankly, I don`t know. All I know is that Seamec is not a stock for the faint hearted. Other than the issue with earnings for FY 2013-14, the company is sitting on a landmine of contingent liabilities (Rs 10 Crs of foreign exchange regulation act [FEMA] and Rs 120 Crs of Custom duty payable, although the company vehemently denies both these allegations). Also, seeing the recent trends in the corporate governance standards of the subsidiaries of multinational companies (see Maruti Suzuki and the controversy surrounding the Gujarat plant/the amalgamation of loss making companies  by Akzo Nobel India which helped the company`s multinational promoters increase stake by 1000 basis points), it is hard to believe that Technip will not do something similar in the near future. Although MNC`s love to brag about the standards of corporate governance in their respective countries, when it comes to operating in India, their ethics and morality go for a toss.

DIVIDEND PAYOUT

The company paid Rs 3/share of dividend in July 2010 (that has been the only instance of dividend payout in the last 10 years. It looks like Technip, the parent company, is so large that dividends from its Indian subsidiary make no difference to it)

DISCLOSURE – I will mostly be purchasing this stock at Rs 90/share.

Snippets from Annual Report

1) For the period Jan to March 2010, the company withdrew one of its from charter hire due to commercial dispute. Due to this, revenue worth Rs 28 Crs has not been realized and Rs 24 Crs of provisions have been recognized on trade receivables from the same client.

Dhanuka Agritech Ltd – Betting on the Coming Agri Revolution

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Dhanuka Agritech is an agri-chemicals (herbicides, pesticides and insecticides) formulation manufacturing and marketing company which has over 82 products, reaches over 1 Cr (10 mi) farmers, had revenues of more than Rs 650 Crs, EBIDTA of Rs 88 Crs and PAT of Rs 65 Crs in FY 2012-13, has bagged the Forbes Best under a billion award 3 times and has a 6% market share in the agro-chemicals sector.   

MAJOR INTERNATIONAL TIE-UPS AND AN ASSET LIGHT MODEL

As per CRISIL`s July 2013 report on the company, the company is in a tie up with 4 American, 4 Japanese, 1 Norwegian and 1 German multi-national agri-chemicals companies. The company with its strong distribution network is a perfect partner to these multi-nationals which have a strong technical expertise but are weak when it comes to marketing their products to the farmer. The company buys the technicals (chemicals that when mixed in the right proportion give the final formulation) from these companies, prepares the formulations and sells the same to the farmer directly.

As per in-Focus July 13 edition titled Indian Pesticide Industry: An Analysis,

“The costs associated with research, development and registration (pesticides must be approved by the Central Insecticides board) of new molecules (formulations) have increased substantially. On an average, it takes more than 9 years between first research and final authorization of the products. Indian companies have not focused on developing newer molecules due to absence of patent protection”.  

As per Emkay research dated October 2012, Dhanuka has achieved a FY 13 RoCE of 28.7% and a FY 14E RoCE of 29.9%. This matches up to its biggest competitor, Rallis India, which as per Emkay has a FY 13 RoCE of 29.6% and FY 14E RoCE of 30.5%.

Emkay goes onto add that  

“Dhanuka` s profit margins are 2nd highest in the industry (after Rallis) while asset light business model results into RoE (26%) higher than industry average by 300-400 bps”

Due to all the above tie-ups, the company has consistently been able to launch a slew of products each year which has helped in a healthy CAGR year on year.

MNREGA AND THE COMING AGRI BOOM

With MNREGA having an effect on farm labour  and Indian agriculture experiencing a mechanization and productivity boom, Dhanuka` s herbicide segment (19 products out of the company`s 82 products), has begun to take a bigger share of revenues (from 20% a few years back to 33% in FY-13 as per Emkay Oct 2010).

Below WSJ article talks about the coming boom in agricultural mechanization

http://online.wsj.com/news/articles/SB10001424052702304441404579121313326574626

Below 2 day old article on Mahindra`s 18% growth in tractor for Feb 2014 is another indication

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CEwQqQIwBw&url=http%3A%2F%2Feconomictimes.indiatimes.com%2Fnews%2Fnews-by-industry%2Fauto%2Fautomobiles%2Fmahindra-tractor-sales-report-18-per-cent-growth-in-february%2Farticleshow%2F31217166.cms&ei=C40UU9XEAevxiAeon4CoCg&usg=AFQjCNHgr_xxpkWuDFV8u24PayEu-4EEcw&sig2=MT4Tujq_GRNg_CxKdbGgmw&bvm=bv.61965928,d.aGc

PROMOTER PROFILE

Promoters hold a healthy 74.99% stake in the company, take home 1.5% of the PAT margins as salaries and have been in the agro-chemicals business for a long time.

HEALTHY DIVIDEND PAYOUT AND CASH FLOWS

The company has paid out Rs 18.5 Crs of dividend in FY 13, Rs 11 Crs in FY 12 and Rs 10 Crs in FY 11. Although dividend yield (stock price/dividend payout) is less than 5%, the payout has been very consistent. Also, since FY 2011, the company has been seeing better cash flows from operating activities.

FII STAKE

41.25 lakh shares of Rs 2 face value at a premium of Rs 80 constituting 8.25% of the post issue paid up capital were issued on a preferential basis to Lighthouse funds. Since then, Lighthouse funds has been allowed to have one of its representatives on the board of the company. As per the company`s FY 13 annual report, the FII holding in the company stands at 8.25% indicating that there are no FII funds other than Lighthouse that have entered into the script.  

DEBT AND WORKING CAPITAL INTENSITY

Company has no long term debt. Short term debt of Rs 33 Crs is seen on its balance sheet. Company`s working capital as a percentage of sales has remained high at 38% for the past couple of years. This trend of high working capital (inventories and receivables are high) seems to be prevalent across all companies in this sector (as per CRISIL July 13 report on Dhanuka) and maybe due to the seasonal nature of demand (monsoon dependent business forces companies to hold a lot inventories).

LOTS OF IMPORTS, NO EXPORTS

Since, the company imports many technical grade chemicals, it has always had a big chunk of raw materials that have been imported. As per KREDENT Dec 2010 report on Dhanuka

“The company used to import over 70% of its key raw material in its initial year of operation”

For FY 13, the company imported only 30% of its raw materials. Nonetheless, the company is still vulnerable to foreign exchange fluctuations.

Also, since the company does not manufacture technical grade chemicals (unlike its peers Rallis India and United Phosphorous), the company does no exports.

BUY RECOMMENDATION RATIONALE

The script, over the past 2 years has been trading at a price band of 8-10 times earnings. For FY 14, the company has till date earned Rs 14/share. In March 13 quarter, the company had earned Rs 3.6/share. Assuming a similar earnings profile, the company will end up with Rs 17.5/share for FY 14, discounting the current market price of Rs 216 by a P/E (x) of 12.5 times.

Indian agriculture is slowly entering an era of high growth driven by rapid productivity increases and companies like Dhanuka (which will help farmers weed out herbs without employing additional farm hands) are going to be the biggest beneficiaries.

Rallis, which is a technicals manufacturer, a major exporter and which does substantially better on the working capital front is Dhanuka`s competitor and trades at a P/E(x) of 24 times.

Dhanuka Agritech is bound to touch new highs. The stock has been moving up substantially over the last 1.5 years and is bound to move up further.

 Disclaimer : I have bought stock at Rs 220/share