Long: Ajanta Pharma update

20120421

A promoter group company GABS investments has been buying aggressively from open market. The stock has touched 550. The board is to consider subdivision of equity shares and dividend on 26th April. I contacted investor relations. I could not find out anything other than the fact that Kamagra as a percentage of total revenues is small only 2.5%. The concerned person was kind enough to tell me this. With this my investment thesis falls flat on it’s face. However, I am not selling out yet. I will wait and analyze the performance for the next couple of quarters before I take a decision on the same. For now, the stock is in a steep uptrend. So let’s make hay while the sun shines.

I continue to hold 12% of my portfolio invested in this stock.

Avoid: Renaissance Jewellery

20120414

It’s a M-cap 150cr SEEPZ Mumbai based jewellery house available at an attractive PE of 3.8. I didn’t find anything interesting or controversial on it’s website, news items and annual report, other than the following facts

Cons:

1. The company acquired 100% stake in N. Kumar Diamond Exports in October 2010, along with it’s fully owned subsidiary House Full. Renaissance intends to sell jewellery in the domestic market through the House Full retail outlets in Gujarat and Maharashtra. To date, the brand House Full isn’t sufficiently publicized on their website except. I can’t find at what price the purchase was made and from whom. From page 52 of the annual report, it seems the company took on a loan of 142cr to pay-off for this acquisition.
2. The company sold 2m equity warrants to promoters and some other investors on a preferential basis @ 76 per share, as per SEBI ICDR regulations while the total shares outstanding as of Dec ’11 end were 19m.
3. Management Discussion and Analysis reveals that Revenue as well as EBITDA dipped y-o-y in FY10. A case can be made whether the company could have bought revenue with debt to camouflage lack-luster performance.

Disclaimer:

I have zero exposure to this company

Avoid: Lanco Infra

20120408

Hyderabad based Lanco (BSE200) doesn’t need much introduction. It has installed capacity of 3GW in 7 thermal, 4 major hydro and rest in wind and solar.

Cons:

1. It’s mostly a power company. 80% of its power off-take is tied down under power purchase agreements with state owned power distribution companies.
2. 73% of its operating capacity was coal based as at end of FY11. More of under construction plants are coal based. Although the annual report boasts of Griffin (Aussie coal mine) as an advantage. Owners of foreign assets are always at risk of backward-looking changes in law after the international prices of commodities go up, be it Australia or Indonesia. All countries want to safe-guard their own industries.
3. Entire 1kcr of FY11 PBT comes from Power while 335cr engineering, procurement and construction. (EPC) is offset by an equivalent loss in other and unallocable segments. Quarterly PAT has turned very volatile in recent quarters.
4. Although promoter share holding is at an impressive 72% of total market cap., 68% of that is pledged. In all 48% of the company’s market cap is pledged.
5. The company changed its method of calculating depreciation on two of its power plants Kondapalli II and Amarkantak, as a result 144cr of surplus other income is reported in FY11, subsequently profits appear to higher by as much, while the annual report states on page26 that total revenues were down 3% between FY10-11. I find it hard to accept that a professional power producer should do this in such business conditions.

Pros:

1. Projected expansion from 3200MW to 6000MW. I can’t find the time-line wherein all new capacity will come online.
2. The share is at a very attractive price of 19, from a Sep ’10 high of 67. I can’t describe how tempted I am to buy a small chunk. However, low price alone is hardly a sound justification of value.

Honestly, I have inculcated in myself a habit to read about any company with a very fresh mind completely free of prejudice or passion, but once I come across more than a couple of negatives, I loose the enthusiasm to read on and locate some positives somewhere or keep looking for a robust story. In this particular company I didn’t even reach the point of applying value investing principals, the more I read the more interesting facts unraveled – another con. 80% of the FY11 balance sheet size is debt, while my estimate of EBITDA/Interes (TTM) is 2.8x (in spite of the depreciation method switch). What if Subbu refuses to relax for few more months?

Disclaimer:

I have no portfolio exposure to Lanco Infra. I don’t plan to buy it any time soon (2-3 quarters). The stock will probably rally, but that can’t be ascribed to value investing.

Avoid: Alembic & Alembic Pharma

20120406

If I were to ask a common person what’s common between glycodin and yera glass-ware, I may get a blank face. I will get as much of a blank face if I were to ask who was the commissioner of IPL before Rajiv Shukla and after Lalit Modi? Some respondent’s faces in fact would be a newer shade of white. The answer is the Alembic pair of companies and it’s promoter Chirayu Amin. Rigorous googling reveals that his image is cleaner than expected, in spite of his close association with IPL.

Back-story:

Alembic Pharma (with the entire pharma business) was demerged from Alembic early last year with 1:1 shares allotted. Before demerger Alembic was available for Rs75 in Apr ’11. Now the pair is available for roughly Rs70 (52 + 18). The demerged Alembic owns the aggregate loss making businesses of real-estate, fermentation-chemistry, and captive power generation (roughly 16MW).

Alembic Pharma: I don’t like the fact that pro-forma fin. statements for FY10 have not been provided in the annual report. I fail to identify any strong story that can drive the business upwards. With trailing 6m PAT at 80cr and FY11 PAT at 60cr, the best guess PE is 6 which is still unpredictable if not hefty. This not a typical spin-off of the Joel Greenblatt recommended category.

Alembic: I was attracted to this stripped-down parent for real-estate. Their website directs to Alchemy (I hope not financial). Their investor relations confirmed my doubt that Alembic and Alembic Pharma have 0% share in Alchemy. To quote them verbatim, “Alchemy is a centralized resource management company providing consultancy and expertise on real-estate development projects of group/sister companies”. Neither listed pair owns anything in Shangri-La (369 residences). Alchemy would develop real-estate as Samsara project (531 residences) on the 11 acre of Alembic land, and pay ‘commission fees’ to Alembic in return. For the 3 reported quarters of FY12, there is zero revenue recognition from real-estate. All real-estate revenue recognition may begin from FY13 according to investor relations. I don’t understand what happens to the real-estate arm of the business once the 11 acre revalued plot of land is disposed off as Samsara flats.

Punters: This would be a great play in the short-term say between 1-3m for punters when Alembic recognizes flat sales revenues and the bottom line catapults from loss to remarkable profit

Disclaimer:

I am too conservative to be attracted to such opportunities. I have zero exposure to Alembic pair of companies and do not plan to invest in them any time soon.

Long: Cairn India (update)

20120404

Cairn India was up 4.66% today on news of second oil discovery in KG basin. It has 49% ownership in the block while the remaining 51% is held by state-owned ONGC.

Avoid : S. Kumars Nationwide

20120329

SKumars is India’s leading textile and branded apparel manufacturer; owns brands like Reid & Taylor, Belmonte and Carmichael House.

Cons:

1. Twelve subsidiaries (with total assets of 988cr and revenues of 82.5cr) remain unaudited according to auditor’s report from AR FY11, within the consolidate balance sheet of 6679cr does actually worry me a bit. Wait a minute! T W E L V E unaudited subsidiaries of a 95cr company? Whooah! By that scale, Reliance should have three thousand unaudited subsidiaries
2. In the entire annual report or website or quarterly statements I can’t find a mention why Reid & Taylor IPO was delayed. I would really like to hear the reason. I am worried that the decision makers want to squeeze out every last rupee from the retail IPO investors by bringing out an IPO at the peak of a broader market bull run. (Somebody once told me, only fools and liars can time the market)
3. The annual report’s MD&A goes on and on subjectively about how disposal incomes and Indian economy is going to grow without any specifics. I would have liked more facts and figures about growth in number of stores, franchise model, marketing plans, etc. My problem is I am unable to build any meaningful story around this stock
4. I don’t like the fact that the promoter shareholding has gradually declined over 3 years

Pros:

1. The brands are terrific. Recognition and brand recall is amazing. Amitabh Bachchan, Shahrukh and Sachin Tendulkar as brand endorsers do indeed provide the right bang for the buck. Several people who do not follow the company, I have talked to are unwilling to believe that Reid & Taylor is a 74% subsidiary of the company, just as Madura Garments is the world-wide (except UK) seller of Peter England, Allen Solly, Van Heusen and Louise Phillipe is a subsidiary of Aditya Birla Nuvo
2. The stock at rupees 32 is available at a terrific bargain of PE of about2.4, however low PE is not very uncommon in textile stocks. Moreover, I can’t seem to figure out where exactly is the growth coming from other than our country’s GDP. Nonetheless, India’s GDP growth ain’t too bad a story to bank upon
3. Applying Peter Lynch’s value investing principals: Just one – it is in a no-growth industry

Disclosure:

I have no exposure to this stock. I do not invest in IPOs. So, I won’t be subscribing to Reid & Taylor’s IPO, no mater how attractive the valuation

 

Long: Network 18 Media & Investments

20120325

This company has a stake in every media venture that has ’18’ in name. Two such companies are listed. Other one is TV18 Broadcast. Network 18 owns 59% of TV18. These two companies together have stakes in MTV (I am a roadies fan), Colors, History, VH1, Nickelodean, CNN-IBN, IBN Lokmat, moneycontrol, yaatra, bookmyshow, Forbes India, homeshop18, etc. Tv18 broadcast has 50:50 JV with Viacom called Viacom18.

Pros

1. Cable Television Networks (Regulation) amendment bill got passed  silently in parliament on 20th Dec ’11 while we and all news media kept focusing on anti corruption fasting and protests (not that the cause is unimportant). Timetable to digitize the entire country ends in Dec ’14. Metros by Jun ’12, Cities >1m by Mar ’13, etc. If enforced, this bill should eliminate subscriptions losses to all paid channels within 2.5 years
2. Within 2 weeks of passing of this bill, Mukesh Ambani struck a complex deal that Network 18 and TV18 would purchase some stake in ETV from RIL, get access to Infotel 4G broadband platform, raise cash through individual rights issues and become completely debt-free
3. The company is a market-leader in nearly every segment. I in particular like the business sense of Viacom18 motion pictures to make movies with moderate budgets and moderately priced celebrities. This is value investing
4. Applying Peter Lynch’s principals: Company is primary in it’s sector, it’s got a terrific niche with CNBC TV18, people have to keep buying it, it is going to be a user of technology, lastly castles in air can be built on this kind of a business
5. Potential of delivering content on a fast 4G network. It appears to me that RIL is compiling media content that will generate huge demand for bandwidth

Cons

1. This story may take 3 years to unfold, that too if the enforcement of this law is strict and timely.
2. The companys are loss making as of now and any delay in retiring debt would be detrimental to the share price
3. Structure of the deal with RIL is too complex for retail investors like me to understand. An RIL associated trust is financing the acquisition of ETV stakes from RIL, yet Raghav Bhal will retain 51% stake in the Net18-TV18 pair. Whooa! How will they do this juggling
4. SEBI has a say in the deal. Not many people knew RIL had ETV stake sitting somewhere on it’s balance sheet. SEBI can penalize them or prevent this deal from going through

Trivia

1. It appears to me, TV18 Broadcast does not own CNBC TV18 or Awaz, but parent Network 18 does. I didn’t want CNBC TV18 to slip out of my portfolio exposure, so I chose to long Network18 instead of TV18

Disclosure

9% of my current portfolio is invested in Network18

Purely happenstance or ahead of the curve?

20120325

Indisputably, DNA Money is one of the top financial daily newspaper supplements. Is it purely happenstance that they have recommended Cairn as a decent buy or am I for once ahead of the curve to recommend Cairn before a leading financial daily does??? My guess is as good as yours. Here’s what DNA has to say…

I would appreciate every kind of criticism…

Long – Cairn India

20120323

It is the largest private sector oil production and exploration company in India. RIL, Videocon Ind and Varun Ind are others. It is a giant business.

Pros

1. It began oil production in Rajasthan in 2010 and has produced oil at a plateau rate of 125kbd through 2011, from Mangala (the largest find). Rajasthan is the largest contributor to profits as of now. Entire 2011 was wasted with company waiting for govt. approval on acquisition by Vedanta and approval to increase prodcution. On Jan 18, 2012 this year, the company got approval to produce more. On Jan 19, the company began production from Bhagyam (2nd largest find). 3rd largest Aishwarya is going to start production within 2012. The company targets production of 240kbd from Rajasthan (30% of India’s production, not consumption)
2. At 125kbd ttm production the company nets more than 8000 cr and trades at PE (CMP/TTM EPS) = 8.21. Net profit should double if 240kbd target is achieved. Bhagyam is expected to touch 40kbd production, while the rest coming from 23 remaining finds within Rajasthan
3. Estimated recoverable reserves are 1.6b barrels in Rajasthan, without using enhanced oil recovery techniques. My back of enevelop estimates of this region at 20% annual increased production is 10y life at least for this field
4. Company was alloted 3 blocks by Sri Lanka and it has already struck oil in 2
5. Peter Lynch’s value investing principals: Primary in sector, it’s got a niche, it’s got a monopoly (nobody can touch it’s oil even if net profit margin is above 60%), people have to keep buying oil
6. It’s debt has reduced between FY10 and FY11

Cons

1. Pranabda has nearly doubled the cess on domestically produced oil from 2500 to 4500 per tonne. Any high margin business is vulnerable to such extortionsit policy revisions by the tax-man.
2. It paid a one-off royalty to ONGC (a road-bloack to the Vedanta acquisition) in 2QFY12, I am afraid such arm-twisting can happen again
3. The CEO himself is speculating in insider transactions even after production approval from the government. In fact he sold low and bought high! I am unable to hazard an intelligent guess on this kind of behaviour.

Trivia

1. It has Rs 25b sitting on its balancesheet as good will for 5 years now, due to which TTM PAT by tangible assets seems to be above 40%. Illusion of great quality of business.

Disclosures

I have allocated 13% of my current portfolio to Cairn India

Long – Ajanta Pharma

20120322

There is more hope than a reliable story backing this particular pick. Nonetheless value investing for sure. It is a pharma company with licenses in Anti-malarial, erectile dysfunction and dermatology preparations. 

Pros

1. It’s erectile dysfunction preparation is Kamagra. The active ingredient sidenafil citrate patent of Pfizer ends this month (March 27, 2012). Most pharma companies will be able to sell sidenafil as a generic drug, without using the words Viagra, Levitra or Cialis. Patent over the use of word ‘viagra’ will continue through 2019. The ensuing chaos and confusion only means a big loss to Pfizer and gain for every generic preparation. Kamagra is famous. Googling yields you several pages as here.
2. The insiders are buying only for the second time in five years as you can see in Feb.
3. Sales 3y CAGR is roughly 40% and PAT 3y CAGR is 24%. Debt to Equity ratio is about 88% and debt has come down between FY10 and FY11. PE (CMP/TTM EPS) = 8.6

Cons

1. It is not clear how much of Ajanta’s sales come from Kamagra at least for a retail investors like me.

Trivia

1. Company keeps shying of Kamagra. Random examples: smaller brand Asmi appears 7 times in Gitanjali’s FY11 annual report, Reid & Tailor appears 11 times in SKumar’s FY11 AR, while the word Kamagra appears precisely ONCE in FY10 as well as FY11 ARs

Disclosure

I have today increased my portfolio’s exposure to this stock from 3% to roughly 11%.