Offbeat MNCs - 2

Paper Products

This is another of those stable and steady but relatively unknown MNC stocks. It is a 61% subsidiary of Huhtamaki Oyj, the Finnish packaging major having 66 manufacturing units worldwide across 37 countries. PPL with facilities in Thane, Silvassa, Hyderabad and Rudrapur (a tax incentive zone) is India’s No 1 consumer packaging company offering complete packaging solutions across flexibles, films, holograms and labels given its USP of innovation, flexibility and value for money. In the domestic market, the entire range of marquee FMCG companies, from local majors such as Britannia, Dabur, to MNC like HUL are all their clients. In the food processing sector they have Kraft, Amul, Knorr, Kellogg etc as clients.

FMCG stocks, also called as defensives for their ability to withstand falls as much as the markets, have been the preferred choices of the markets over the last few years due to the inherent stability and steady consumption-led growth. Rising incomes, nuclear families, urbanization and a younger and more affluent population continue to be the key drivers on the demand side. In addition to this, the rural marketing efforts of FMCG manufactures have increased the size of the market. From packaged foods to personal care products, almost every category has been clocking robust growth. Quite a few of the FMCG majors in India, be it Godrej, Marico or MNC like HUL, have all touched 52 week-highs in recent times, even in these markets. And if these companies do well, it would follow that their major suppliers, especially on the organized side like PPL, would significantly benefit, even if not in the same measure.

NASP (New Applications, Structures, Products and Processes) continues to be the Company’s flagship programme to counter competitive pressures. And in this endeavor, PPL was supported by the ‘global innovations team’ of Huhtamaki Flexibles Global. The company is working on numerous projects with customers with a global footprint (most MNCs with significant Indian operations) with active help and support from the Global NPD team.

Products that affect the lives of people every day present an opportunity for packaging. Children and young adults influence family purchases besides being spenders themselves. Besides normal channels, theme based promotions are additionally routed through packaging. All this bodes well for PPL. They have recently completed capex at Rudrapur given the tax benefits there.

 

At around 60, PPL trades at a PE multiple of less than 10 with a dividend yield of about 4%. Considering the kind of brand value and the clients this company has, the scope for growth led by FMCG industry and undemanding valuations for an MNC company in a niche domain, this should go places in times to come. The major risk to PPL is from the unorganized sector who may leverage their better pricing power and low margins to garner a greater share of a growing business. However, the support of its parent in extending their global relationships with FMCG majors to PPL and quality products preferred by organized players and MNCs should hold it in good stead.

Offbeat MNCs - 1

While much has been said and written about the well known MNCs, quite a few of which have come out with delisting offers at mouth-watering valuations and others are well on their way to do so to beat the max 75% promoter holding deadline, not much is published about some of the other well-established ones which though may have boring businesses have been steady performers over the years. Investing in boring businesses may be boring but if one is looking for excitement, there are always the casinos of Las Vegas and closer home, one can pick up shares of Kingfisher and indulge in all the excitement that occurs daily with it.

DIC India (formerly Coates of India) is a 72% subsidiary of DIC Asia Pacific Pvt, Singapore. This in turn is a wholly owned subsidiary of the USD 9 billion Japanese group, Dainippon Ink & Chemicals, or DIC. DIC, the world’s largest manufacturer of printing inks, besides dealing in Graphics Arts and polymers and related products (organic pigments), has interests in specialty plastics and compounds, such as thermosetting resins, colorants and engineering plastics. The company is also involved in building materials, water treatment plants, pressure-sensitive adhesive materials, bio-chemicals and food and foodstuff.

Coates of India was originally promoted by Coates Brothers Plc of the United Kingdom in 1947 in Kolkata as a fully-owned subsidiary and subsequently became a public limited company in 1976. In 1991, Coates Brothers was acquired by the French company TotalFina, a leading player in the petroleum sector, which also acquired a 51 per cent stake in the Indian company. Then, in 1999, TotalFina exited the printing inks business worldwide in favor of Sun Chemicals, a DIC subsidiary). In due course, the company changed ts name to DIC india to truly reflect its actual parentage.

The company started with the objective of manufacturing printing ink, printer sundries, synthetic resins and other surface coating materials. Over the years however, they have divested most of the other businesses to the respective global leaders in the respective areas (notably the adhesives division to Bostik, and coatings business to Valspar Corp of US) to focus on their core business of inks.

DIC India makes printing ink and they have seven manufacturing plants, all located in the metros - Delhi, Calcutta, Chennai, Mumbai. Since the metros have good consumption and considering the demand for printing ink in packaging and so many other things, they have virtually been a leader. The attractive part about the company is the small equity base of 9.18 cr that they have. This company has its year-ending in December and for 2011 which they have just finished, they have declared their results with topline of close to about Rs 700 crore, a robust EPS at about Rs 28-29 and book value at 290. That means the stock of an MNC is available at 0.9 times book value, and @about 270, a P/E of about 9.

This is not a flashy player unlike the other MNCs which flaunt P/Es in excess of 20-30 irrespective of their actual growth, but over the years has shown a steady growth. The parent holds about 72%, so technically there is no worry for it as it meets the criteria of < 75%, as is the case with quite a few MNCs which have been flying on the bourses over the last year in anticipation of delisting and some have actually gone on to do it. Interestingly, none of the MNC schemes of mutual funds (Birla Sun Life, UTI etc) holds this stock in their portfolio, at least not in the top ones. Considering the steady business growth, and the dirt cheap valuations the company enjoys currently, there is ample scope for growth going ahead. If the parent do decides to delist, it will be an added bonus.

Thursday Thoughts

IVRCL group was in the news a few weeks back and after a lot of hullabaloo and posturing everything has gone dead quiet like a deflated balloon. And the group stocks have come down to their pre-euphoria abysmal levels. The main reason for the thing going dead appears to be Essel group’s public reassurance that they are not looking at a hostile takeover and are merely an active investor with close to 12.3% stake in IVRCL. So what happens now?

I, for one, don’t believe that Essel group would be satisfied with just being a financial investor. They have of course said that with their holding, they will scrutinize the decisions taken by the company’s board, which effectively means they do want control. Why else would they have spent so much money for the 12.3% stake and yet haven’t asked for a board seat? Surely not for the dividends. And significantly, they hold more stake than the original promoters themselves (11.2%), This is something which just doesn’t jell right. A view in the market is that the Essel group may steadily increase its stake to 25% – the open offer trigger limit – before launching an offer to public shareholders for a further 26%, as stipulated by the Takeover code. My guess is that Essel group is just biding its time and waiting for an opportune moment to assert its superiority. If they don’t find something the company does to their liking, they may well exercise their superior stake and get their way. They may also ask for support from other investors, not all of whom may deny it to them. Institutions hold 43% in IVRCL, corporate bodies 21 % and the rest is with the public. FIIs now seem to hold the trump card in this battle, with a 37% stake. So it looks an interesting situation to be in if you are an IVRCL shareholder. The latest book value of the company is Rs 74.32 per share and they are quoting way below that. At pre-60 levels there is very little that can go wrong here.

To add to the above consider the following:

Ø  They hold about 55% stake in Hindustan Dorr Oliver which is an excellent engineering company. It was expected that they were looking to sell this company and various names ranging from a Pirmala to a foreign company were doing the round a few months back. Apparently the deal fell thru on valuations. The promoters of IVRCL apparently wanted something in the rage of 90-100 which no prospective buyer was willing to give. It appears that they have decided to wait for better times before making any further moves in this direction.

Ø  They are planning to merge IVRCL Assets & Holdings, which is essentially their BOT arm into themselves. The latter is an infrastructure developer, with a portfolio of nine toll roads, three of which are operational. The planned merger, if implemented, will bring the toll road business into the IVRCL fold and allow them to monetize their land bank and PPP projects, which will be housed in a separate unlisted subsidiary as a part of the scheme of arrangement. This will allow them to substantially reduce their debt from the current levels, which is the main reason for their current state. Not only this, their total stake in the merged entity will go to 13.6% which will be higher than that of Essel.

All in all, Essel or no Essel, no better time than now to board IVRCL and/or its associated companies (IVRCL Assets & Holdings and HDO) which will move in tandem with it.

Niche IT companies

While the IT sector no longer commands the valuations it did a few years back, with growth tapering down and valuations following, there are some companies in this sector which, though not large, excel at what they do. They have mastered certain domains and skills from the environment in which they grew and have made them their own calling cards. Some of these companies have attracted the right kind of attention globally while others are still striving for it. 

Oracle Financial Services Software (formerly iflex Solutions and CITIL prior to that) was formed out of COSL (Citicorp Overseas Software Ltd., a captive for Citigroup) in 1991. While COSL's mandate was to serve Citicorp’s internal needs globally and be a cost center, CITIL's mandate was to be profitable by serving not only Citicorp but the whole global financial software market. As is well known Oracle bought Citigroup's 44% stake in the then i-flex solutions in Aug. ’05, a further 7.52% in March and April ‘06, and 3.2% in an open-market purchase in mid-April ’06. In January ‘07, after an open offer price to minority shareholders, Oracle increased its stake in i-flex to around 83%.

The main interest of investors and market players is waiting for Oracle to delist this company as the valuations are not exactly cheap here quoting at more than 20 times earnings though growth has not kept pace in the same proportion.

Kale Consultants was incorporated way back in 1986 by technocrat entrepreneurs, Mr. Narendra Kale (who later founded Patni as well as Silverline) and Mr. Vipul Jain who till date heads the company (even after the takeover by Accelya, a Spain-headquartered BPO company). It is one of the few mid-sized Indian IT firms serving customers in the airline, logistics and travel industries, and has most of the airlines as its customers using its flagship product for their core operations.

It attracted the attention of Accelya after about 25 years during which time it consolidated its operations (it sold off its banking division, which was mainly into services, to Polaris a few years back) and established firm focus on the niche travel and aviation domain. Its fortunes now will be dictated by how it works with Accelya and manages to be in its priority list. However, considering that Accelya now has a significant cost advantage in getting its work done thru Kale, the company should do well ahead. The only major risk could be the step motherly treatment it may receive from its parent the way Mphasis did from its parent HP in terms of pricing and more recently Patni from iGate (thankfully iGate paid a premium to get it delisted recently and it may have a level playing field if it is fully merged into the parent; that it got delisted recently doesn’t automatically mean that it will merge with iGate).

Besides the above, who have already attracted global attention, there are a few small IT product companies, strictly small cap, which could attract the attention of global players in their domain at some point in time (more likely a few years) with their niche products and skill sets.

Polaris Financial Technology (earlier known as Polaris Software Labs), headquartered in Chennai, was setup in 1993 to cater exclusively to the requirements of Citibank. In 1994, they implemented an end-end Retail banking solution for Citi Bank India. Gaining from this experience, they set up more development centers to cater to the banking sector technology needs as also exclusively for Citibank. In 2003 they acquired OrbiTech, a Citigroup subsidiary. Through this acquisition, they acquired the Intellect suite of products (mostly surround banking applications such as Lending) and formalized this brand as their flagship. All their products were and are now being launched under this brand. Besides the products, they also have supporting practices in the financial sector such technology services and consulting which contribute a significant part of their business. The company has since moved away from having Citi as a sole customer and has a large number of global banks and FS firms as their customers.

Citigroup through Orbitech merger and on its own has a stake of about 30% in the company. Franklin Templeton holds about 5% in the company. Institutional holding at 33% is quite high and within this, FIIs own nearly 22%, rest being with domestic financial firms such as insurance companies and mutual funds.

The main trigger for Polaris would be when Citigroup looks to exit it by selling its 20% stake. There would surely be many suitors for this stake since the buyer would not only inherit a great set of products but also strong domain expertise in the FS sector, A while back, there was rumor that IBM was eyeing this stake, but nothing came of it. However, interest of other biggies in Polaris can’t be yet ruled out since there are firms like HP without a significant application products portfolio and CSC which is primarily into Insurance. The stock, along with the rest of the midcap IT stocks has been beaten down much more than warranted and is now quoting in single digit PE multiples.

Four Soft is a small company in Supply Chain Logistics space with some marquee customers like DHL, Maersk which are leaders in logistics space. That these companies have bought its products for their core operations speaks well of the company. Its other products include solutions for etc. They have product suites addressing a lot of areas of the supply chain such as freight forwarding and logistics, extended warehouse management, customs brokerage, shipping line execution etc which can be bought in a modular manner and implemented. Promoters (P. Srikanth Reddy and associates) hold about 30% in the company with PSR himself holding about 22%, Kotak Mahindra VC fund hold about 10%, Ashish Dhawan (former head of PE Chrys Capital) personally holds about 3.6% of the stake. The company came out with an IPO in 2004 and is still in its growth phase and hence has not shown any worthwhile results to speak of. Considering the niche area it operates in, it may be worthwhile to keep an eye on it in the coming years. But being a small cap, there will be the usual issues of corporate governance, transparency etc and it might be some years before it catches anyone’s eye. But when it does, the returns could be bountiful.

Take Solutions is a global technology solutions and service provider, with significant focus across two principal business areas – Life Sciences and Supply Chain Management.

Started in the year 2000, TAKE has grown exponentially over the decade and is today represented by over 750 employees catering to more than 390 marquee clients across 6 countries. With its global headquarters located at Chennai, India and US headquarters at Princeton, NJ, TAKE makes its global presence felt through its well-established offices across North America, European Union, Asia Pacific, Middle-East and South-East Asia. In the Life Sciences space, Cadila Pharmaceuticals, Reliance Life Sciences, Indoco Remedies, NATCO are some of their customers in India while they claim to serve Novartis, Pfizer and Johnson & Johnson abroad.

4 years ago, there was a proposal to merge both Take Solutions and Four Soft due to the overlap in their Supply Chain and Logistics domain which did not take off due to valuation issues.

Recently Take has started focusing on the current hot technology of cloud computing. The company has designed a cloud-based product for SME for effective management of information flows covering the entire supply chain structure. They have already tied up with Amway and Toshiba for the product. The company feels the global logistics and supply chain market will be looking for specialized software that focuses on continued technology advancement.

Four Soft and Take Solutions are more or less in an identical space with Take having an added area of Life Sciences, though how much progress it makes in this specialized area remains to be seen. Four Soft is competing with companies such as Kale Consultants and Take Solutions in the Logistics space.

Subex is again a much focused company in the telecom domain and has been battered over the last few years due to the travails of the global telecom industry. Even so, it has quite a few of the global telecom giants as its customers. Its most celebrated products are in Revenue Assurance and Fraud Management and Credit Risk Management applications for telecom operators.

It came out with an IPO in July ’99 @75/share and since then has given 2 bonuses – first in Aug ’00 and then in Feb ’06, both times 1:1. In spite of this, its equity is not too high @69 crores. So in that sense it has been investor friendly. It is only the global environment that has led to its sorry state of affairs. That it did not deviate from its focus area is a commendable thing (as some firms did over the last 10 years especially in times of global crises; shifting to flavor of the season from Y2K to ERP to open systems and whatever was in vogue at a particular time and took their fancy). It is quoting at a P/E of about 14 which is quite high for a midcap company and that too focused on the telecom domain. But once its immediate troubles are over, it should be on its way to stability. 

That it hasn’t been acquired yet is not really a surprise because the global telecom industry has not had a smooth 5 or 10 year run in the last 10 years and the likely acquirers themselves were in a spot during such times. However during this period, it acquired a few small companies across US and Europe with mixed success - UK-based Azure Solutions in 2006 was a great success, the Canadian telecom software firm, Syndesis Ltd in March 2007 for $164 million (funded through $180 million of FCCBs maturing in March 2012 later became a millstone around Subex' neck). The acquisition of Syndesis turned bad at the height of the financial crisis in 2008, when Syndesis clients failed to place orders as expected, making it look overpriced. Revenue at Syndesis, projected at $50 million for the 2008 fiscal, turned out to be half that. The FCCBs that were due for conversion into equity by March 2012 at Rs656/share, or redeemed at a total $245 million, accentuated the distress. The Subex stock was beaten down to as low as Rs18 in mid-March 2009 from an all-time high of Rs803 in mid-January 2007.

The main issue which hung over the stock, was the repayment of USD 130 million of FCCBs. RBI has now cleared their proposal to restructure these bonds over another 5 years. So the current set of FCCBS which were maturing on July 9 will now be extended/rolled-over for another 5 years at competitive interest rates currently prevailing and Subex will save quite a chunk on their annual interest outgo. Once the bondholders clear this proposal over the next 2 months, things should look up for this.

Promoters hold nearly 12% stake and among its main shareholders are the Govt of Singapore with close to 6.5%, and Rakesh Jhunjhunwala with nearly 2%.

Geodesic operates in a niche area of developing various innovative products in the ICE (Information, Communication and Entertainment) space. Geodesic, owing to its inventive capabilities across all aspects of communication and collaboration, is widely recognized for its pioneering universal instant messaging system which is a scalable content, contact management, presence, real-time communication and collaboration platform. The company offers its products and services under the "Mundu brand name for the retail segment. The company has effectively used the above platform to build and deploy innovative front-end applications, viz. Mundu Instant Messenger(IM services including AIM, ICO, MSN, Yahoo and G Talk on the web, desktop and smart mobile phones), Mundu Radio (allows users to tune into thousands of internet radio stations on their mobile phone), Mundu Speak (VOIP on Mobile), Montage, etc., for the retail segment.

The company has redefined a seamless user experience across content and communication. Sometime back, they acquired Chandamama - a 60 year old children's magazine, which is in the process of being digitized and mobilized as part of the company's vision to draw in multimedia content. Geodesic has signed several agreements with leading Radio stations, TV Channels, Cell companies and Movie production houses to further Chandamama's foray into these exciting new digital mediums

Fidelity thru its various arms holds about 10% stake in the overall FII stake of about 33% (which itself is quite high and reassuring). This along with other midcap IT stocks has been battered down and is now quoting in single digit PE multiples. As and when it starts unlocking value in its products either thru direct sale or thru partnerships with global biggies, its fortunes should improve significantly.

Recently this space of communication and collaboration has attracted the interest of several social networking players such as LinkedIn and Facebook (Glancee just a few days back, Tagtile, Instagram a short while back). So it would be interesting to see how the promoters take Geodesic forward.

There may be other companies too claiming niche in certain areas without actually having anything to show for it. For e.g. take the case of e-governance. I am not sure how this can be called a niche when all you are doing is automating a department in a public or private sector firm or for a government. It is after all a service that is provided and the IT service firm next door is likely to provide it as well as anyone else. The tools and technologies used are also not something requiring a great deal of specialized knowledge for anyone to claim sole superiority in their usage. So that would exclude from my list firms like Mastek and NIIT Tech among others who claim to be a niche player in this area.

i-flex was formed in 1991; so it took about 15 years for a small company like i-flex to come to the notice of a large global IT company like Oracle. So these companies are only for the very patient ones who can stomach a few years of ups and downs as surely there would be. And there is no guarantee either that all of these will hit pay-dirt over that period. But even if a couple of them click, it may be worth the wait. After all i-flex came out with an IPO only in June ’02 @530/share and has multiplied 5 times in the period since, primarily due to Oracle acquisition.