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Analysis – Mayur uniquoters

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
July 7, 2010
5 Min read
31 comments
A

About
Mayur uniquoters is in the business of manufacturing synthetic leather. The company’s products find usage in the footwear, automotive, apparel and sports goods industry.
The company supplies to the major automotive companies in the country and abroad. The company has Ford, GM, and Chrysler as customers in the export market and maruti, Tata motors, Hero Honda and other local players as domestic customers. In addition the company is also a supplier to the replacement market.

Financials
The company has performed quite well in the last 8-10 years. The topline has grown by 20% and net profits by 25% in the last 8 years. The current year profits are a cyclically high due to lower raw material costs and exchange related gains.
The company has consistently maintained an ROE of 15%+ and has reduced its debt to 0. The company now has excess of cash of almost 15 crs on its balance sheet.
The current net margins of the company are around 9% which as stated earlier are higher than normal. The normalized profit margins can be assumed to be between 6-7%.

Positives
The company has been doing fairly well in the last few years. The company has been expanding in the export markets and is now an approved supplier to several international OEMs such ford, GM etc. The company has managed to grow inspite of the recession in the export markets.
The company is also a debt free company and can fund the required capex from the cash on the books.

Risks
The company as an OEM supplier is bound to face continued and relentless price pressure from its customers. In addition, the raw material component is around 75% of the sale price and hence the margins of the company are very sensitive to the raw material prices.

The industry is very competitive and it is unlikely that any participant in the industry can earn large profits in the long run. A ROC (return on capital) of 15% would be a good return for an efficiently managed company.

The no.1 risk is not the business, but the management’s intentions. The management awarded themselves around 800000 (around 15% of equity) warrants in 2007-2008 and exercised those warrants at market price. I consider this as a big negative.
As I have stated in the past – warrants are not free and have a value in itself. In addition, the company did not seem to be in need of capital at that time. The sole purpose of issuing the warrants seemed to be to increase the holding of the promoters (which now stands at almost 75%)

Competitive analysis
The product is characterized by minimal brand value for the end customer. The customers (automotives, apparels etc) however value quality and a reliable supplier for the synthetic leather going into their own products. As a result the brand value exists in the mind of the OEM (original equipment manufacturer) buyer.

The industry is characterized by a large number of smaller players in the unorganized sector of the market. The industry is highly competitive with thin margins and poor quality among the smaller players.

The larger companies like Mayur have an opportunity to establish themselves as reliable suppliers to the OEMs and benefit from the economies of scale at the same time.

Management quality checklist
– Management compensation: the management compensation does not appear to be high. The management (who are also the promoters) is paid around 5% of the net profits (around 80 lacs) which although not low, is reasonable.
– Capital allocation record: the capital allocation record seems to be decent. The management has paid down debt, raised dividend over time and now has cash to re-invest in the business. It will be interesting to see how the management will deploy the surplus cash in the future.
– Shareholder communication: disclosure seems to be adequate and in line with other companies.
– Accounting practice: could not see anything out of the ordinary. I need to dig deeper to find if there is anything to be concerned about
– Conflict of interest: other than the warrants, I could not see any related party transactions of concern.
– Performance track record: fairly good so far

Valuation
The company can be assumed to have a normalized profit margin of around 6-7%. As a result the net profit is in the range of 12-13 crs on a normalized basis. As the industry is highly competitive, it is difficult to assume an extended period of high returns for the DCF calculation.
A back of envelope calculation (assuming PE of 12-13) gives a fair value of 150 crs.

Conclusion
The current price is 50% of the fair value. The crucial point is not at arriving at a fair value number, but figuring out the economics and future profitability of the business. If the current numbers can be maintained, then the stock is a bargain.
The other major concern I have is the management attitude towards the minority shareholders. The warrant issue does not inspire confidence and has left a concern in my mind.
I am still halfway through my analysis and will make up my mind after I dig deeper into the company

Disclosure: I have a starter position in the company. A gain on my current position will not pay for than a nice dinner. Please make your investment decisions independently.

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Keeping papers in order

By Rohit Chauhan
In General thoughts, Uncategorized
June 29, 2010
2 Min read
10 comments
K

This is going to be a fairly odd and short post. I am going to discuss a topic which is not a fun topic, but nonetheless important.

Are your papers in order?
God forbid, if something were to happen to you tomorrow – does your family know the financial situation and has access to all the documentation?

I have heard of a lot of stories and personally encountered some, where the head of the family died and the heirs realized that the paperwork was a mess. I cannot tell you how painful it is to sort such matters.

So, I would suggest each one on us should atleast do the following
· Make a will
· Please add nominee in all your accounts – bank accounts, demats, FD etc
· Have a term insurance which pays in the unfortunate event of your death
· List all your accounts details on a piece of paper, make two copies with one in possession of a close family member and the other one in a locker
· Consolidate your provident fund with your current company – I repeat, please do this now! Getting provident fund issues sorted is a nightmare especially if they are old issues.
· File all the paperwork properly and update it atleast once a year.

I am myself partly guilty on not following all of the above. However I am continuously trying to ensure that my paperwork is in order and plan to clean it up further in the next 1-2 years.

You may be the next warren buffett or Rakesh jhunjhunwala or whatever you are dreaming of, but if your paper work is a mess, your family is going to suffer. The last thing you want is for your family to suffer due to the paperwork in addition to the emotional problems.

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A personal experiment

By Rohit Chauhan
In Uncategorized
June 20, 2010
5 Min read
25 comments
A

I was recently talking to a friend and he made an interesting comment after looking at my blog.

‘Why do you target beating the market by 2-5%, when you can make 80-90% per annum by trading? I recently started trading and have been making almost 7-8% per month. You should do that too!’

I have heard this comment from a lot of people in the past. The only common feature is that such people trade for a few months, make good returns and extrapolate it to annual returns. Ofcourse, the very same people after losing money in the market make a hasty retreat and are never heard of again.

The quants
I am currently reading a book – The quants. It is quite an entertaining book, though I doubt there is anything to learn from it. The book is about various kinds of traders who use mathematical models and high power computers to trade in the market. It talks about a few hyper successful traders at various firms such Goldman sachs, Morgan Stanley, deutsche bank and hedge funds such as renaissance technologies and citadel investment group.

Some of these trader/ investors were pioneers in their fields, the best of the best and achieved in excess of 30% annual returns over 10 years or more. The best returns were posted by renaissance technologies, which seems to have posted annual returns of around 40% over 2 decades.

The point of the above commentary is this – If you can make 30-40% annual returns for a few years and prove it, there are people who will be ready to handover millions to you to manage. You will be rich and can retire soon. If you can make 40% or more, then you will be considered a god and there is will be books written about you – think of George soros and others.

If you think you can make 70-80% per annum for the next 10 years, then you are day dreaming. If you think you can make these kinds of returns, as my friend suggested while working in a full time job, you should meet a psychiatrist and get a mental health check done.

I think the chance of 1 crore rupees dropping on someone from the sky while walking on the road is higher than making 70-80% per annum for the next 10 years. A 75% return for ten years will give you 269 times you starting capital and 73000 times your capital in 20 years.

A personal experiment
Let me come back to title of my post. If you are new to the blog, let me say it outright – I am biased against short term trading. I do not believe it is the right approach for me. It may work for others, but not for me.

I have said this more out of a general belief and not based on any specific experience, atleast till now.

So, this time around I tried an experiment. I decided to experiment with trading in the last few months. I bought some stocks for day trading, did some momentum buys and sell and did some news based trading too.

At the end of the experiment, I tabulated my results and found that I had made around 18% on my capital in around 3 months. The maximum loss was around 6% and the highest gain on a single position was 11%. The average holding period ranged from 2-3 days to around 15 days.

A success?
If I annualize, then the returns come to around 72%. Should I declare it a success and start trading actively?

I do not term the experience as a success and do not plan to trade ever again. Let me tell you why.

I typically check my long term positions once in a month or a quarter. My broker is one unhappy guy as I have very few orders in a month and my account is generally a sleepy account.

The above experiment seems to be a success only in terms of the returns. What is not obvious is the effort and the pain behind it. I found myself scouring the internet and bse website for news and tips. In addition, I found myself checking the stock price several times in a day. There was definite change in my thought process as I found myself more anxious, stressed and reacting more and more to daily news.

I realized that my short term approach started infecting my long term though process too. I started looking at my long term holding frequently and started getting more anxious about them. One fine morning, I just plugged the plug and stopped all the trading. Life is good now and back to normal 🙂

A typical experience?
So does it mean long term investors should not trade? No, it only means that I should not trade because I do not have the temperament to do it.

The point of the post it this – One should invest based on one’s own temperament. Some people like fast paced action and the adrenaline rush, so trading may the right approach for them. I prefer a slower and more sedate approach where I will analyze a company for a long time and then slowly build my position. Now if that nets me lower returns, then so be it! Atleast I will sleep well at night and not check stock prices continuously during the day.

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Quick analysis – Patels airtemp

By Rohit Chauhan
In Investment ideas, Uncategorized
June 13, 2010
3 Min read
15 comments
Q

About
Patels airtemp is in the business of condensers, heat exchangers and air conditioners. The company is in the same industry and business space as Blue star limited which is a better known company. You can find more about the company here

Financials
The company has been business since 1973, but has started doing well for the last 5 years. The ROE of the company has increased from 7% to around 30% in 2009. The company is almost debt free and may have some excess cash by the end of 2010.

The company had a revenue of 72 Crs and 8.7 cr net profit in 2010.

Positives
The company has grown its topline by more than 30% and bottom line 40%+ in the last 6 years. However at the same time the growth has come from extremely small base. The company has paid off its debt and is now debt free.

The company has a fairly diverse clientele and supplies its products to a wide variety of industries such as cement, chemicals, petrochemicals, textiles and engineering. In addition the company has the benefit of an ever expanding and growing market for its products.

Risks
The company is in a very competitive business with competitive advantages related to scale of operations. A substantial portion of the business comes from projects which involves competitive bidding. The company has started growing in the last few years and it remains to be seen if the company will scale up and enter the big leagues.

The current margins are in the range of 10%+. Blue star which is in a similar business has margins in the range of 5-7%. The ROE for both the companies is in the same range as Blue star is a more efficient user of capital compared to Patels airtemp. The efficiency is mainly to the size of the company. The difference in margins could be due to the pricing/ quoting approach of the companies.

If blue star is more aggressive in bidding, then we are likely to see Patels airtemp follow the same path if it intends to grow beyond the current size. If this happens, we are likely to see a reduction in net margins, though the bottom line could still grow with the topline.
Bold
Conclusion
One can look at the financials of the company and assume that patels airtemp would continue to grow at the same rate. If one can make an assumption or have a strong reason to believe that the performance of the last 4-5 years will be repeated then the company is a bargain.

At the same time, one should also consider the fact that the company has been in the biz since 1973 and managed to grow to just 16 crs in the first 30 yrs. The rapid growth and improvement in the performance has come in the last 6 years.

I personally have not been able to make up mind on which scenario will play out and plan to follow the company and dig deeper. It is easy to assume that the company will repeat the performance of the last 6 years, declare the company to be undervalued and buy into it. I however would prefer to investigate deeper and watch the company for a while before buying into it.

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