Bought the company`s stock after reading about it in an edition of Business India. One of the promoters who had toured a pump manufacturing facility abroad got hold of a pump, brought it back and began the process of reverse engineering the same. In 1982, after getting financial assistance from the Madhya Pradesh Financial corporation, the Patidars setup a pump manufacturing facility in Pithampur, Indore with a capacity of 1500 pumps/year. Currently, the capacity of the company is 600,000 pumps per year. IFCI`s Green venture fund currently holds a 12% stake in the company. A darling of FII`s, the company`s distinction of being the first Indian 5 star rated pump manufacturer has really helped it along in the stock markets.
MISC EXPENDITURE
Miscellaneous expenditure for 2008-09 at Rs 80 lakhs, 2009-10 at Rs 1.8 Crs, 2010-11 at Rs 1.05 Crs and 2011-12 at Rs 4.8 Crs. As per Shakti`s definition, misc expenditure includes pre-op expenses, software expenses and deferred expenses on advertisement. Most striking are pre-op and software expenses(separately, a software development expense ranging from anywhere between Rs 5 to 8 lakhs included in Admin expenses also) whose breakdown is Rs 1.7 Crs and Rs 1.4 Crs respectively for the years 2008-2011. Some reservations about this discussed below
1)Why should a pump manufacturer spend Rs 1.4 Crs on software expenses?
2)What is the pre-op expense for? The new booster plant? If yes, then why is the same not mentioned?
3)In Annual reports 2008-09, 09-10 and 10-11, there is a breakdown of misc expenditure while 2011-12 has no breakdown. The investor is made to stare down a huge expenditure of Rs 4.8 Crs without any explanation as to the cause of the same.
Foreign Currency convertible bonds
The company in 2007 had issued $ 6 mi worth of foreign currency bonds which amount to nearly Rs 27-30 Crs. Financial charges/expenses during the issue of such bonds usually amount to 3-5%, but the company has peculiarly charged nearly 11% as deferred FCCB expenses from 2008-11.
Snippets from Annual Reports/Other sources
1)Market development charges go up from Rs 2.3 Crs in 2009-10 and Rs 9.3 Crs in 2010-11.
2)How about this for a vision statement: The Company expects to generate 35% annual revenue growth around 9% net margin leading to a turnover of Rs.500 cr by 2015, strengthening our investable surplus. (2011-12).
3)As of 2011-12 AR, Rs 15 Crs spent on employee benefit expenses, but the investor has no idea about the number of employees working for the company
Low debt combined with good FII interest makes this a decent script to play with, if you had bought it at around Rs 40. The script is currently trading at Rs 56/share. If only the company were more willing to disclose more information about its workings and bring in more transparency about its accounting procedures, this will be a good long term bet. Until then investors can take their money and exit.
DISCLAIMER: I had bought this script at Rs 44/share. At that time, the close was close to being a net-net (market cap>working capital). But seeing the kind of accounting standards being adopted by the company and the lack of transparency, I am just waiting for the script to touch Rs 70 after which I shall happily exit (the promoters have given themselves warrants at Rs 88/share for 1,200,000 shares, amounting to nearly 10% of the company`s outstanding share capital. Mr Warren Buffet will not be happy if he sees this)
Author Archives: thepokaranmoneymanager
Tata Sponge – Neck deep in Cash
Tata Sponge is one of India`s largest sponge iron maker (based out of Odisha) with a capacity of 390,000 tonnes. Tata Steel`s stake in this company was at 39% until a few months back, after which a buyback was initiated at Rs 375/share. Tata Steel looking to increase its stake to 50% after the buyback. Not only does the company get valuable managerial and market inputs from Tata Steel, but also the company`s total iron ore requirement (worth Rs 200 Crs as of last year) has been provided by Tata Steel. The same if procured in the open markets would cost substantially more for the company. This is the main reason for the wonderful PAT and cash flow numbers the company publishes year on year.
WHAT IS SPONGE IRON
The 2 types of raw materials for steel making include: pig iron and sponge iron. While pig iron is produced by the blast furnace route in which iron ore is melted, sponge iron is made by a direct reduction process (no phase change of iron ore [solid to solid reduction]). The different manufacturing processes employed for making pig and sponge iron endow them with inherently different physical and chemical properties. As a raw material for steel making, pig iron is used by primary steel producers who have access to coking coal while secondary producers (who do not have access to coking coal) use sponge iron instead of steel scrap as their raw material (just for a perspective, 55% of Indian steel is produced by secondary steel producers).
INDIAN SPONGE IRON INDUSTRY
The massive increase in steel demand combined with restricted availability of quality scrap led to the growth of the Indian sponge iron industry. At an installed capacity of 33 million tons per annum, India is the world`s largest sponge iron producer and Tata Sponge Iron at 390,000 tons is India`s largest coal based sponge iron maker (Essar has the largest gas based sponge iron plant at 5 million tons per annum).
But, as with all infrastructure sectors in India, the sponge iron industry is currently facing a slew of problems related to raw material availability (coal and iron ore due to environmental issues and government scams), logistical problems and a general economic slowdown.
THE CASH CONUNDRUM
Stuff with Rs 220 Crs of cash and Rs 25 Crs in mutual fund investments, the company`s market cap of Rs 460 Crs can be discounted by this cash component (zero debt company). That comes to an enterprise value of Rs 215 Crs. With the average of the last 3 years PAT coming to Rs 90 Crs, the company`s P/E is 2x (P is enterprise value). The company, unable to find any worthwhile investment opportunities is doling out the cash back to shareholders. At a dividend of Rs 8/share the company has paid out a total of Rs 36 Crs over the last 3 years.
MINING SCAM
The company has been one of the prominent names in the recent coal mining scams. Allotted the Radhikapur(East) coal block in 2006 (120 million ton coal block allotted to 3 companies with Tata Sponge having highest stake of 45%) , the company was reprimanded by the Inter ministerial group(setup to investigate the coal scam) for not developing the block in time and subsequently, the Bank guarantee worth Rs 32 Crs submitted by the company was en-cashed. The company has gone to court and the issue in stalemate.
POWER BACKUP
Coal based sponge iron produces large amount of waste heat which the company uses in its 26 MW waste heat power plant. It is hard estimating y-o-y revenues from these plants considering that waste heat availability is dependent on the sponge iron plant`s availability which swings wildly (2011-12 only saw 80 MU`s [million units] of electricity sold while 2009-10 saw 120 MU`s being sold).
WHY TATA SPONGE
Ultra cheap valuation, Tata group backed company, access to Tata Steel`s iron ore and excellent operational efficiencies are reasons convincing enough to stock up on this script.
It is these kinds of discrepancies between intrinsic value and market cap that offer a jackpot to the patient investor. People are scared about the wild swings in the prices of commodities and the effect of mining scams. Nonetheless, that does not mean that we are going to stop using metals in the near future. The best companies which operate most efficiently will find ways out of these situations. In such a scenario companies like TATA sponge iron will emerge stronger than their more inefficient peers.
DISCLAIMER:I have a vested interest in seeing this script go up.
Snippets from Annual Reports/Other sources
1) The radhikapur(east) coal block if developed would entail a cost of Rs 600 Crs, of which Rs 435 Crs would be debt funded massively increasing the company`s gearing.
2) Company planning for 25 MW AFBC boiler (atmospheric fluidized bed combustion). Project cost of same budgeted at Rs 150 Crs.
Both above snippets from ICRA credit services dated Sep-2010
3) Company envisioning to become an integrated steel producer and hence the move to develop the coal block. But the huge capex involved for the same and social baggage of land acquisition making the company to hesitate.
4) AR 2011-12 balance sheet showing Rs 220 Crs of cash and equivalents but very peculiarly, the cash flow statement shows cash and equivalents at Rs 36 Crs. Probably a Rs 184 Cr error during preparation of the statement.
Nitta Gelatin – A Protein kick
A joint venture between the Kerala State Industrial development corp (KSIDC) and Nitta Gelatin Japan, Nitta Gelatin India has been in the business of making Gelatin and associated products for the last 38 years.
SHAREHOLDING
While the 2 above mentioned promoters hold 80%, FII`s hold 0% stake in the company. With an equity base of 84 lakh shares (out of which 80% illiquid due to promoter holding), no wonder the stock tends to have a roller coaster ride on the markets.
PRODUCT LINE
Company moving on to higher value added products (B2C segment) in recent years. Collagen Peptide for bone and joint strengthening, seed growth enhancement and a slew of new products will enable company to sell directly to the customer. For 2011-12, Collagen peptide sales crossed Rs 7 Crs(mainly in southern states of Kerala and Tamil Nadu).
WHAT IS GELATIN
Made from crushed animal bone(bovine, poultry and fish) and being easily digested by the human body, you will find gelatin as a constituent of many over the counter drugs(OTC) that you use on a daily basis (check out the contents of garlic pearls tablets).
STOCK PRICE VOLATILITY
Volatility of PAT component over the years (2010-11 PAT of Rs 2 Crs compared to 2009-10 PAT of Rs 25 Crs) combined with an illiquid script have scared investors away from this stock.
RAW MATERIAL PROBLEMS
The above mentioned PAT volatility was due to raw material fluctuation(crushed bone and hydrochloric acid prices going through the roof in the last few years) and constant work stoppages at one of its Ossein plant in Kerala(due to environmental concerns). The setting up of a new Ossein plant in Gujarat is a sign of geographical diversification away from the company`s traditional manufacturing base in Kerala. Although the solutions to raw material price increase are beyond the scope of the company, it is good to see that the company has tripled its PAT to Rs 15 Crs for 2012-13.
STOCK ILLIQUIDITY
This May 2013, the company has recommended a bonus issue of shares in the ratio of 1:3, one bonus share for every three existing shares (only for non-promoters). If my calculations are right, then this will increase the equity share capital to 90 lakh shares.
WHY THE ATTRACTION
Low debt, strong product pipeline, strong promoters (Kerala govt and Japanese MNC), consistent dividend payouts combined with cheap ratios like an 8x P/E, 1.2x P/BV make this a very attractive pick.
Disclosure : I have a vested interest in seeing this stock go up. I have bought some at Rs 115.
Snippets from Nitta Annual Reports
1) Company invested Rs 28 lakhs in a number of companies(Organo fertilizers, Kerala Enviro, KK organics etc). A provision with the same value has been created and the above investment effectively written off.
2) Rs 4/share dividend declared for the year 2010-11. For 84 lakh shares, this works out to Rs 3.36 Crs. Cash flow statement of AR 2011-12 shows dividend paid for FY 2010-11 to be Rs 5 Crs. Must be some error.
3) For year 2010-11, company achieved PAT of Rs 1.89 Crs but paid out a dividend of Rs 3.36 Crs. Too much emphasis on dividend irrespective of company`s performance ? Or excellent cash flows?
Tata Steel – Blue chip to Value pick
Warren Buffet in his visit to India had spoken about the investment opportunities available in the metals space. With the spike in commodity prices over the past ten years, coupled with the rapid growth of India and China, Buffet was interested in dominant metal players with strong pricing power and subsequently, he invested $1 bn in POSCO, the South Korean steel giant. This recommendation is written partly as a result of the awe I have over Buffet and the inherent simplicity of the argument in favour of large integrated metal players holding captive ore reserves which act as a hedge from volatile fluctuations in commodity prices.
Tata Steel has fallen from a high of Rs 700 two years ago to the current price of Rs 300 (expected to fall further with the recent easing in Chinese growth numbers), reason for this being the perception that the European debt crisis would worsen the operating performance of Corus, a subsidiary of Tata Steel acquired for $ 12 bn during 2007-08.
Tata Steel India Tata Steel Europe Tata Steel Group
Total Income(2011-12) 37,000 82,000 137,000
PAT(2011-12) 6,700 (4,200) 5,000
Cap Utilization(2011-12) 105% 78%
Source: Tata Steel Annual Report 2011-12
All number in Rs Crs
As seen above, Tata Steel`s Indian operations are the key to its global ambitions. Corus with an annual steelmaking capacity of 18 mtpa (million tons per annum) has plants in UK and the Netherlands. The Netherlands facility with a capacity of 7.4 mtpa [4] (million tones per annum) is said to be one of the most efficient steel plants in the world[5]. The price paid for Corus has led many to believe that Tata Steel paid dearly to acquire an ailing, high cost, loss making company.
Why Corus
First, the global steel industry is facing a consolidation phase which began with the acquisition of Arcelor by Mittal Steels. The combined entity of Arcelor-Mittal has an annual capacity of 90 mtpa [7] or around 6% of the world`s total annual capacity[7]. China leads the world with a capacity of around 750 mtpa[8]. The steel market in China is so fragmented that it has close to 800 steel producers[9], 125 of whom are integrated[9] steel makers (steel makers with captive mines). For steelmakers to survive and continue having an element of pricing power, the industry needs to consolidate. Tata Steel`s acquisition of Corus took it from 65th [10] to nearly the 8th largest steel producer.
Second, the acquisition allowed Tata Steel, a low cost producer of basic steel to merge with Corus, which produces higher value added products and is a process technology owner.
The third and the most important reason for the acquisition is the history behind Corus. Corus was formed by the merger between British Steel Ltd and Hoogovens, a steelmaker based in Netherlands. Two top quality, efficient steel makers had been merged, with the result being a loss making behemoth on the brink of collapse(call it mismanagement). Moreover, Corus was handicapped by the fact that it did not hold any captive mines and was dependant on the highly volatile steel scrap market for its raw material. By 2005, the company had realized that a merger with a low cost steel producer which had access to captive mines was the only way to prevent bankruptcy. Subsequently, a bidding war erupted in 2006 over the control of Corus which included the Brazilian steelmaker CSN, Tata Steel and 2 Russian steel makers: Severstal and Evraz.
Tata Steel India
Coming to the Indian operations, Tata Steel India`s stunning profit margins are not simply the result of good management, goodwill and other most commonly assumed parameters. Rather, it is due to the low cost and high quality of iron ore that Tata has access to. At $ 150/ton of steel, Tata Steel`s cost of production is far lower compared to the $ 330/ton of other Indian steelmakers [11]. It is estimated that in India, iron ore bought in the spot market can be 5-15 times more expensive than captive ore[13]. Nearly 100% of Tata Steel`s iron ore requirement and 60% of its coal requirements[12] are sourced from captive mines (Indian operations). Such a level of vertical integration is impossible without Tata Steel`s vast history and heritage. Although it may not be possible for Tata to remake the Indian magic outside the country, we can be rest assured that the group`s vast footprint will enable it to secure mines and raw material sources in other parts of the world. Tata Steel`s ability to completely integrate its upstream and downstream operations are an important part of its strategy to revive Corus.
De-Leveraging
Tata Steel`s current debt of Rs 50,000 Crs[14](nearly Rs 60,000 Crs, 1.5 years back)will concern any investor. Tata Steel itself seems concerned and has begun to aggressively disinvest, restructure and infuse equity to bring down leverage.
1) Began with the sale of a Corus plant in Teeside for Rs 2500 Crs[15].
2) The bigger stake sale in Riversdale mining company for Rs 5000 Crs[16].
3) Hybrid perpetual securities (quasi equity/debt) worth Rs 2,250 Crs (11.7% interest) issued in the last couple of years.
4) 5.7 Cr shares allotted via Follow on public offer (FPO) at a price of Rs 610/share infusing Rs 3500 Crs of equity in Jan 2011.
5) 2.7 Crs shares allotted in 2010 and 2012 to Tata Sons Ltd on preferential basis on conversion of warrants at a price of Rs
594/share infusing Rs 1600 Crs of equity.
The cost of buying out Tata Steel works out to Rs 80,000 Crs (market cap of Rs 30,000 Crs and debt of Rs 50,000 Crs). Setting up a new global steel producer from scratch will take 5-6 years and entail a cost of Rs 55,000/ton[17]. With an annual capacity of 27 million tons(after commencement of 2.9 mtps Jamshedpur expansion expected in 2012-13), setting up something similar to Tata Steel will require a capex of Rs 150,000 Crs, leave alone the effort it would take to acquire mines, develop the brand, distribution channel and other attributes that takes to become the world`s 6th biggest steel maker. Clearly, stock markets overlook the above fact.
The market has factored in all the negatives related to the Corus acquisition. This is the reason Tata Steel is trading at a historical low of Rs 300. In the present scenario, while the markets are worried about the downside, the contrarian investor sees a good buying opportunity. Of all the 4 steelmakers who had bid for Corus, Tata Steel is the best poised to be able to take this acquisition through. The Tata group is the UK`s biggest employer and is in a better position to deal with the workforce and the government in UK and Europe. The very survival of Corus depends on the Tatas and it is obvious that the Corus workforce and European governments understand this (read the socialist French government`s assistance to Arcelor Mittal). Tata Steel is in an excellent position to turnaround a sick Corus and emerge as one of the world`s largest steel makers.
Disclosure: I have a vested interested in seeing this stock go up. I have bought some at Rs 350. Economic data from China are showing signs of softening. You can be rest assured the Tata Steel script will hit new lows from here in the medium term. As the same happens, request you to continue piling up a very long position in Tata Steel
Snippets from TS Annual Report 2011-12
– Cash and cash equivalents shown as Rs 3945 Crs for Tata Steel standalone. This does not include Tata Steel`s stake in Tata Power and Motors worth Rs 4,600 Crs
– A contingent liability to buyback all of NTT Docomo`s stake in Tata Teleservices could setback Tata Steel by nearly Rs 1000 Crs (at CMP of Tata tele)
REFERENCES
1) domain.com: Tata-Corus: Visionary deal or costly blunder?
3) http://www.tatanykshipping.com/tatasteelgroup.html
4) http://www.tatanykshipping.com/tatasteelgroup.html
5) domain.com: Corus acquisition will impact Chinese Steel market
7) http://www.arcelormittal.com/corporate/about.html
9) Did Tata Steel Overheat in Its Zeal to Win Corus?: India Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4158)
10) http://www.biztechreport.com/story/1459-indian-companies-acquisition-spree-overseas
11) Did Tata Steel Overheat in Its Zeal to Win Corus?: India Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4158)
13) http://businesstoday.intoday.in/story/tata-steels-raw-materials-need-lease-of-life/1/11903.html
14) Tata Steel Annual Report FY 2011-12
15) http://www.thehindubusinessline.com/companies/article1571479.ece
16) http://www.thehindubusinessline.com/companies/article2110379.ece?homepage=true
17) Did Tata Steel Overheat in Its Zeal to Win Corus?: India Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4158)
AVANTI FEEDS – The Prawn Superstar
Ever seen a script move up from Rs 34 to Rs 36 just because you bought 750 shares in the open market ? I have, with Avanti Feeds.
AVANTI FEEDS, a company based out of Hyderabad with manufacturing facilities all over Andhra Pradesh sells animal feed (for fish and shrimp) and processes shrimp for the export market. While the feed division produced 60,000 MT`s(metric tons) of animal feed, the shrimp processing division produced 2000 MT`s(2011-12). For comparison, in 2009-10, the company produced 16,000 MT`s of feed and 1000 MT`s of processed shrimp.
Why the massive jump in sales ?
It is due to the introduction of an exotic species of shrimp called P.vannamei in India. This species(originally from South America) has become famous in Asia (and the world over) with nearly 75% of the shrimp produced in Asia being of the above variety. Experts believe that the switch in India from the traditional black tiger prawn variety to the Vannamei is due the following: 1) Lower cost of production 2) Lower cycle time and 3) Higher yield .
http://pib.nic.in/newsite/PrintRelease.aspx?relid=94595
As per the above Indian government website, marine product exports have crossed $ 3.5 bn for the first time in the year 2011-12, a growth of 30% compared to the previous year. Frozen shrimp exports constitute nearly 50% of all marine exports from the country(recording a 50% growth in 2011-12 thanks to vannamei and drop in US anti dumping duty from 12% to 2%), underscoring the importance of this sector to the Indian marine industry.
The above Economic times article is typical of the challenges faced by this new variety of shrimp, with the biggest concern being the unknown pathological risks involved in producing it. Although the government is taking stringent measures to control the inflow of broodstock into the Indian market, these are still early days and the new industry is bound to face some ups and downs.
Balance Sheet
One of the first reasons for buying Avanti Feeds in late 2010 was that the script was a net net(market cap < working capital). Currently, the stock trades at a P/E multiple of 3x (using FY 2011-12 earnings) and its CMP at Rs 100 is below the book value of Rs 106. With a market capitalization of Rs 90 Crs, debt less than Rs 50 Crs, cash balance Rs 22 Crs and a consistent dividend payout for the last 6 years (2011-12 dividend Rs 6.5), this is a real value pick assuming that you are ready to handle the ups and downs of the script(Rs 200 to Rs 100 in last 5 months).
Avanti Thai Aqua Feeds Pvt Ltd (ATAF)
Avanti Feeds in collaboration with Thai Union Frozen Products Ltd (world`s largest tuna canner) setup ATAF, a JV with a share capital of Rs 7.83 Crs to build a 10000 MT shrimp feed plant in Gujarat. Thai Union also took a 15% stake in Avanti Feeds Ltd. Subsequently, in 2011-12 ATAF was amalgamated into Avanti Feeds and Thai Union`s stake in Avanti increased to 25%. Currently, 2 executives from Thai Union are on the Board of Avanti Feeds providing valuable industry inputs. Moreover, the R&D and technology transfer assistance from Thai Union to Avanti will be of significance in the coming future.
Major Shareholders
Promoters (41%), Thai Union (25%), Andhra Pradesh Industrial Development Corp (6%) and FII`s (0%) [remember what Mr Rakesh Jhunjhunwala says about the growth potential of good small cap companies with low FII holding]
A booming seafood export industry, technical and market assistance from a world class multinational, low debt, low FII holding and a market price below book value. Avanti Feeds is the perfect recipe for making a fortune.
thepokaranmoneymanager 