update 07/03 – just saw this news on a likely open offer for lanxess ABS. thats a lucky break !!

I had posted the following on my old blog earlier.

Tuesday, May, 25th, 2004

Am i missing something

i have been analysing Bayer ABS.
Found the following positiives
1) selling at 6 time current estimates
2) has zero debt
3) has shown a growth of 10 % plus for the past 5 years
4) has reduced debt and capital employed ( returns in excess of 25 %)
5) Parent – Bayer has strong R&D in plastics
6) user industries such as telecom/ IT / Auto are growing
7) moderate competitive advantages in form of patents / good brand for some products / R&D support from parent

negatives
1) Bayer has not been very share holder friendly ( has vijay mallya as chairman !!!!!!)
2) trying to move several businesses into fully owned subsidaries
cant think of too many negatives. am i missing something ? am i wrong ?
Posted in Weblogs at 03:43:46 AM

I have been re-analysing the company and have come up with the following analysis

The company is now called Lanxess ABS. It is the largest product of ABS (60% market share) and SAN in india. The product is used in by various OEM such auto industry, consumer durables etc.

Performance
The topline for the company has increased by around 11% per annum for the last 6 years, but due to input price pressure, the bottomline has increased by only 3% p.a. The company has performed fairly well inspite of the spike in crude prices (which impacts the raw material costs). As a result of the crude price increase the net margin of the company has come down to 4-5%. The company was not able to pass on the increase in input cost immediately. However with stabilization of the crude prices, the net margins have now increased to around 5-6% and we chould see an increase in the net margins going forward.
The company has improved the various asset turnover ratios during the period. As a result the company has a heatlhy return on capital of 20%+ with zero debt. In addition the company holds almost 80-85 Crs of cash on books which is almost 25% of the market cap

Competition
The main competition for the company is Bhansali polymers which is the second largest company in the product space. Both companies have similar margin structure and seem to be operating as a duopoly. The company has decent pricing power and can maintain a resonable return on capital.

Valuation
With netprofit of around 28 Crs and cash of almost 80 Crs, I would atleast value the company at 450-500 crs. As a result the company is available at a discount of 30-40% of the intrinsic value.

caution : i hold this security. I may continue to hold or sell as i see fit. I may or may not post when i make a sale. Hence the above analysis (as always) is not a recommendation.

A few more investment ideas which have passed through the initial filters.

Alembic – A mid cap pharma company. Revenues have gone up from 550 Crs to around 750-800 Crs for the current year. Net profits in the same period has gone up from 30 odd crs to 80-82 Crs. The margins have doubled in the same period, however the ROE continues to around 20% due deterioration in inventory and fixed asset turns. The valuation at around 7-8 times PE looks interesting. Definitely worth further investigation.

Infomedia – The company is valued at around 20 times normalized earnings. The bottomline has been more or less stagnant. The reason for looking at the stock was it has appeared in rakesh jhunjhunwala’s portfolio recently. However I cannot see the value in it (and also I am not as smart as the big man to be able to see the value, so need to study the company more)

Gruh finance – A subsidiary of HDFC and selling at almost 6-7 times the latest quarter earnings. Seems to be a well managed company and worth a closer look. Diffcult to conclude from looking at the numbers alone in case of an HFC. However the company is defintely worth a closer look.

update : 06/26
Had a look at gruh finance again. It is selling at around 20 times annual earnings and 3 times book value. At this price the stock may not be over-valued, but does not look like a bargain too. A good company to track and wait for the valuations to come down a bit

Manugraph and VST – I will be posting detailed analysis for these companies in later posts.