Monday, November 19, 2012

Clean profits

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Jyothy Labs (JL) is widely known for its Ujala brand of fabric whitener used along with washing powders usually in washing machines. The company was started in 1983 as a single-brand company, with Ujala Fabric Whitener as its flagship product. However, over time, JL has grown by diversifying itself, both in terms of its product portfolio and market size across India. The company now is present in 5  different segments with its brands - fabric care (Ujala), household insecticide (Maxo), dish/surface cleaning (Exo), personal care (Jeeva) and air care segment (Maya). The company has 28 manufacturing facilities in 16 locations across India, of which some are tax-efficient units.

It started off with a South India focus but last year has changed that. In August ’11, it acquired an 84% stake in Henkel India, a subsidiary of German MNC Henkel AG. Till its acquisition by Jyothy, Henkel was a JV between the Dusseldorf-based Henkel AG and the Chennai-based A C Muthaiah group (thru its flagship company Tamil Nadu Petroproducts, TPL) with the German firm holding 51%. The JV was said to be the coming together of two formidable forces, one an international major with a strong footprint in Europe and North America, and a local company, which produced the raw materials that went into making detergents. The German parent had a presence in major areas such as laundry, home care, cosmetics, toiletries and hair care with international brands such as Pril, Fa, Mr. White and Henko. This was further consolidated with the acquisition of Shaw Wallace’s Calcutta Chemical Company in 2000, which gave the JV brands such as Chek, Margo and Neem Active toothpaste. Despite this, the company failed to take off and the main reason being cited is the differences between the partners. The Indian partner apparently had a limited role to play in the JV owing to its minority holding, while the German parent simply wasn’t devoting enough time and attention to the business since it was a small dot in their universe.

The company Henkel was grappling with too many problems - an underperforming business, mounting losses, huge debt, and a set of products that hardly evoked recall beyond the south and the east. Henkel operated in laundry & home care and beauty & personal care segments. Increasing competition in these two segments especially from the likes of Hindustan Unilever (HUL) & Procter & Gamble (P&G) led to the drop in sales. Both HUL and P&G waged a price war to capture share. Both dropped prices by almost 25-30 per cent in key brands such as Tide Naturals and Rin. The resultant war hit companies such as Henkel too who had to drop prices to stay competitive. The other major worrisome factor was Henkel’s inability to expand reach beyond the south and the east. Its distributors were mainly concentrated in the urban pockets of the two regions. After trying to revive the JV’s fortunes, the German parent decided to call it quits in the Indian market and sold off its stake to JL. With this acquisition, Jyothy Labs jumped in one shot from being a 5-brand company into the big league with six new brands in its stable, namely, Henko, Mr White, Fa, Pril, Margo and Neem. This has created several advantages for JL:

1. An added advantage of straddling the entire price spectrum from mid-premium, premium and niche.
2. Immense opportunities to explore in terms of achieving revenue and cost synergy, which will result in substantial revenue growth, leading to higher operating margin.
3. A balanced presence in the rural and urban areas, as JL’s ratio of rural and urban presence is 75:25 and that of Henkel was 30:70.

Over the last 15 months since the acquisition, JL management has earnestly put in place a turnaround strategy for Henkel which in turn will boost JL’s fortunes as well. The major steps being taken include:

1.  Decentralization of manufacturing operations of Henkel’s brands
2.  Raw material synergies due to non-dependency on TPL (which Henkel was earlier required to have due to TPL being its promoter). Also better negotiating leverage.
3.  Streamlining sale and distribution costs which were a major factor in Henkel’s problems
4.  Brand re-positioning

And the recent quarter results have validated the above steps with Henkel’s financials improving significantly. It is not out of the woods yet, but neither does it appear to be far off from profitability. Henkel’s return to green should have a cascade effect on JL’s bottom-line since most of the cuts had come from its acquisition.

Recently, JL announced plans to raise Rs. 550 Cr for 20% stake, to retire debts, arising out of last year’s Henkel buy. PE firms like TPG Capital, Advent International, Warburg Pincus and Bain Capital are in the fray to acquire stake in Jyothy Labs. JL is also in talk with GIC Singapore, UK’s Actis and Apax Partners.

A few years back, JL also forayed in the organized service sector with the launch of its laundry business thru a subsidiary Jyothy Fabricare Services. It is now touted as the biggest laundry chain in the country with 122 retail outlets in Bangalore, Delhi, Mumbai, Pune, Chennai and more recently Hyderabad, most of which have come from local acquisitions. This business though is still nascent and doesn’t contribute much to the top-line and/or bottom-line. IL&FS Investment Managers Ltd has invested Rs 100 crore in this business.

Recently, the company has appointed Mr. S. Raghunandan as its Chief Executive Officer (CEO). Mr. Raghunandan has worked with Reckitt Benckiser, Paras Pharma, Dabur India, and HUL, among others, at senior positions. The step seems to be a positive move at the right time since JLL-Henkel consolidation has been completed and the company is now ready for a takeoff. A professional man at the top can only take the company higher.

Though its valuations are not cheap by conventional norms, they are certainly cheap compared to other FMCG companies. While the biggies HUL and P&G (who are in the same business segments) quote at 5.18 and 6.2, and Godrej Consumer quotes at 7.74, JL quotes at just 4.12, though it is on a smaller scale than these. Also while Godrej and P&G quote at P/E multiple in excess of 40, JL is at 30 @170.

Considering the major drivers of increasing profitability with Henkel’s improving financials, foray into niche laundry services business (with value unlocking opportunities) and relatively cheap valuations compared to peers, this should take off over the next few quarters.

Monday, November 12, 2012

Diwali Dhamaka 2012

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Here’s wishing everyone a great Diwali and a prosperous new year ahead. To enhance the prosperity further, let me share some useful information regarding some stocks which you might want to add to your Diwali shopping list:

Maxwell Industries
I had written about this way back in February ’12, when it was quoting at about the same price as now. So in effect there has been negligible movement in the stock over the last 9 months. But then again, I am not particularly surprised since this is on expected lines. However, what merits attention are a couple of things which they have done since:

1.  As planned, they have started their own retail stores under the brand ‘Inners’ which would be an inner wear studio for all their inner-wear product at Kopar Khairane, New Mumbai on August 15, 2012. And they followed this up a month later with another store at Kalyan-Murbad Road, on September 09, ’12. Spread across a typical carpet area of 300-350 sq ft, each store has an investment of roughly Rs 15-20 lakhs. Nationally, the company has set a target of opening 100 stores in next three years. The plan is to soon move to Gujarat across major cities like Ahmedabad, Vadodara, Surat and Rajkot with 8-10 such stores across these cities. In Gujarat, the plan is to target the entire family. Hence, the 'Inners' store will have all kinds of brands including VIP, Frenchie, Feelings, Brat and the French brand Eminence. This apart, the store will also offer other accessories like socks and track pants. While the VIP, Frenchie and Feelings brands cater to men's and women's inner wear segment, Brat is meant exclusively for kids. Maxwell Industries is exploring both company-owned and franchised formats of opening up the retail stores. At 'Inners' stores, the price range will vary anywhere between Rs 70 and Rs 700 for various inner wear and accessories of brands owned or managed by Maxwell Industries. So they have indeed started executing their strategy of expanding and positioning themselves in Tier2/3 towns and cities, which looks like a good start.
2.  Their ttm EPS has increased to 0.71 from 0.32 in Feb ’12 which shows a gradual improvement, though in % terms, it is huge (more than 100%). This has brought its ttm P/E to a more realistic level of 32 from 73 earlier. This is still way ahead of its fundamentals at this point, but can be considered as a step in the right direction. As the company’s performance improves, the P/E will come down to a more realistic level reflective of its true valuation.
3.  Reliance Capital holds 14.55% stake in the company, bought @32, as of last quarter shareholding disclosed. Besides this, the promoters hold 64%. So this may also fall in the < 25% public shareholding category, depending upon the interpretation.

Given the above, this surely has some way to go from current levels.

Indian Motor Parts and Accessories (IMPAL)

IMPAL belongs to TVS Group and distributes auto parts and accessories. It has 50 outlets, 50 offices and market products manufactured by 50 manufacturers to about 35,000 dealers across the country. With this kind of network, considering the auto boom and the replacement market, this is quite robust and healthy. One should not take this company as a pure distribution or marketing company.

They have posted a topline of about Rs 250 crore with a PAT of about Rs 14 crore. This has translated in to an EPS of Rs 17 for first six months. Over the last 4 6-month periods, they have consistently given EPS in the range of 30-42. In the last 6 months, they have given a bonus of 1:1 thus doubling the equity and hence the EPS has halved. On a pre-bonus equity, the EPS would still be 34.

Their equity is quite low at about Rs 8.32 crore. They are holding about 13,90,000 shares in Sundaram Finance, the present market value of which is close to Rs 134 crore. Apart from that they have parked Rs 20 crore in liquid mutual funds. They also have some other investments. All this put together comes to about Rs 155 crore against their present market cap of Rs 330 crore. But even if we take their pure financials, it has been a consistent performer. The five year growth chart of the company shows that they have been continuously increasing their EPS. Also, they are very good dividend payers with dividends ranging from 12-19/share over the last few years. So this is a very consistent company with very good performance. The set distribution network across the country gives a feeling of comfort. From the current price of 400, it can surely give about 20% returns from here, once the economy improves and auto sales start booming as they did earlier.

Electosteel Steel

This is a part of the Electrosteel group which also has another listed compnay called Electrosteel Castings (EC). The company was promoted by EC to setup a 2.5 MTPA integrated steel and ductile iron spun pipes project in Jharkhand, in a technical-financial collaboration with Stemcor Mesa, the world's largest steel trader with a network of 80 offices across the globe. The company came out with an IPO is Sept. ’10 @11/share. The promoters hold 34.5% in the company along with other major investors such as Stemcor (18.33%), IFCI (4.57%), IL&FS Financial Services (3.43%). The parent company EC has been in the business of manufacturing CI Spun Pipes for over four decades and D.I. Pipes since the last 15 years.

Electrosteel Steels (ESL) has started trial production at its rebar rolling mill with bought out billets on October 11, 2012. This production is part of ESL’s steel plant project, located in the Bokaro district of Jharkhand. Recently, the company said it expected to achieve financial closure for this steel project by end-November. The company has also arranged and invested the balance funding required though equity of Rs 412 crore. The project, which is nearing official commissioning, will be the first integrated manufacturing facility in the country which will produce steel and also value added products such as ductile iron (DI) pipes. Slated to be amongst the top five largest single location plants in India, the company said it would have a product basket comprising other long products such as wire rods, TMT bars and billets.

Recently in Aug. ’12, they allotted 15.20 crores to the promoters EC @10/share. And the current price is about 7, a discount of 30% to that price.

This is in the same mould as Nagarjuna Oil Refinery which is also close to the commissioning of its plant (the recent issues of the cyclone damage notwithstanding). In both the cases, it is only a matter of time before the plants get on steam and start producing. Though there may be a gestation period for the current investment, it must be remembered that as the date nears, the price will start increasing to factor in the plant output and the financials. So it is a call between significant/multi-fold returns after a few months/years and the wait that the money would have in the intervening period.

Specialty Restaurants

This is the only listed restaurant in the Indian markets and as such enjoys a scarcity premium over others who may have this business as a part of their other businesses (Sayaji Hotels is a case in point. While it has a hotels as well as restaurant business thru its wholly owned subsidiary Barbecue Nation, it enjoys a P/E of about 28 while Specialty Restaurants quotes at a P/E of about 38. Once BN is hived off/sold/listed, it should enjoy much higher valuations than SH and SH should also benefit from the value unlocking. There is no other listed restaurant/fine dining listed company that I know of and I am not including Dominos here since it has a fundamentally different business model).

SR came out with an IPO @155/share in May ’12 and has only a very short history in the public domain as regards its financials. However, what has surely made a lasting impact on the public domain is its brand of restaurants and sweets outlets such as Mainland China and Sweet Bengal among the notable ones followed by Oh! Calcutta, Sigree and Machaan to a somewhat lesser extent but known all the same (it has a total of 10 brands across 82 outlets). So the promoters appear to have a good feel of the public pulse where food is concerned. The other promising factor is the huge margins employed by the F&B business. In fact a majority of the multiplexes today are saved by their profitable F&B business compared to the lumpy fmls exhibition business. On the flip side, fine dining also comes with its own costs which involve significant expenditure in real estate rentals and the maintenance of luxury d├ęcor which is often a necessity for them. Here, SR scores because of the "asset light model" that they follow by leasing all of their properties and operated restaurants which allow them optimize capital for growth. However, this also has the risk of increasing rentals over time.

The other major factors which plagues the industry in general and hence SR are high raw material costs, inflation and wage increases of skilled and semi-skilled workers. The first factor may be managed to a large extent by passing on the costs to the well-heeled diners of the restaurants but the other is a real worry.

All in all, this is a proxy for the much-vaunted public consumption story that is finding favor with investors these days with the likes of Jubilant in the premium snack foods category and Page Industries again in the premium in the inn-wear segment enjoying very high valuations. Also, this sector has started attracting the attention of PE investors who don’t appear to mind betting on the culinary tastes of Indians. SR is currently quoting at about 178, not too high above the IPO price of 155. Given the above environment, SR should surely do well in the period ahead.

Besides the above, there are a couple of stocks which merit attention at the current time – Onmobile Global and Pipavav Defence. Both have good business models and are in growth areas. A few hiccups in the near past have brought them down significantly. I have already written about these earlier and things have not really changed since. They present good investment opportunities on this auspicious occasion.


Monday, November 5, 2012

Attractive rights

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At a meeting of the board of directors of City Union Bank (CUB) held on Saturday, 3rd Nov, it was decided to fix the rights issue price at Rs. 20 per share of Re. 1 face value.  The existing shareholders will be offered equity shares in the ratio of 1 share for every 4 held by them. The record date has been fixed as November 23.
Considering the current price of about 60, a very good opportunity exists, apart from long-term buying, even for arbitrage i.e. buy in rights issue and sell in the market post Nov. 23. There are always chances of getting more shares than eligibility though the proportion may vary based on the response which again is a function of the ratio and price. In this case at least, the last factor is extremely attractive. So people are likely to apply for far more than they are eligible for. In that sense, the additional share allotment will not be very high.
FII hold about 21% stake in the company.