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Posts in category Value Pickr

MPS Ltd (27-10-2015)

Let me try and answer the questions. Most of what you have asked is already covered in the thread.

  1. Nisith Arora had already clarified in the earlier call that it will preferably be two or three acquisitions as opposed to one to spread the risks. He clarified on the call yesterday that talks are going on and some of them have fallen through at the valuation stage. To surmise that the money was raised without any acquisition target in mind is a stretch. Price negotiations are the trickiest part of any acquisition and quite a few deals fall through at this stage.
    Another interesting point that he raised in the call yesterday was that the sellers are seeking out MPS to sell their companies. Sounds interesting but will have to wait for some meaningful merger to happen before we can take this at face value.
  2. As investors in MPS, we should be clear that the organic growth will at best be between 10-15%. I would personally pencil in 10% for my calculations. Their entire sales strategy is based on farming existing clients as opposed to having more feet on the street and knocking on doors of new clients i.e hunting. This is a strategy that they have consciously adopted to keep the sales cost in check. This is why it is important that they acquire companies which come with a steady revenue source as opposed to say a TSI evolve which had the right people and domain expertise but need to be redeployed on new projects to gain revenue.

The management wants to be a $80 million company in the next 3-4 years and they are working towards it.

Rahul Arora seemed more confident on this call as compared to the one last quarter. However, the management was not convincing on the questions about revenue growth. Not knowing the sales and profit figures of the three small subsidiaries that you have before you come to an investor call was a miss as far as i am concerned.

The slack that the investor community is cutting the MPS management is decreasing with every passing quarter and i hope that the management is aware of that.

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Associated alcholols & breweries ltd (27-10-2015)

any news in associated alcohal

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My mistakes with the stock market (27-10-2015)

My key learnings are:
1. Do a lot of diligence on management. Biggest losses come from management which are not looking out for minority shareholders. There are many ways to judge this.
2. Only invest in stocks where you understand the business. If you don't understand the business, don't invest.
3. It is good to average up on a stock as confidence builds in a company/stock. Many times we anchor ourselves to the initial price and want the stock to come back to that price. However, if you can see yourself holding it 5-10 years there is no harm in buying more at higher price.
4. Mentally think through how you will react if the stock you have purchased falls by 10%, 20%, 30%, 40%. Do the reverse for stock that is approaching your sell price.
5. Know your stocks/business better than most. This means keep track of what is changing in that business/price and be willing to act.

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MPS Ltd (27-10-2015)

I missed the concall.. someone who has attended it if they could possibly discuss some of my queries here? @ayushmit @Mahesh your take now on MPS story?

  1. Why is the acquisition taking so long? (is it a series of bolt-on acquisitions management is looking at or is it a single large deal?). Typically a situation where you are still nascent stage to acquire companies and deal negotiation not even on the cards you should not be raising QIP!!! (Its a very bad practice!) I hope the PE doesn't get re-rated for this...

  2. Results of Q2 so far look nothing extraordinary.. But why have the revenues grown only by 6%? (11% on CC)? Also the bottom-line looks like a case where management have taken price cuts to grow on volumes?

3.What is the outlook of the management in terms of where they see MPS headed? (you have taken profitability up in excess of 30% the only thing that matters now is ability to grow! preferably organically...)

Regards
Sreekanth

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Kitex Garments Limited (27-10-2015)

Few thoughts:

1.A company whose sales growing at 11% is trading at a PE of 32.Isnt it pricey?Even a back of the envelope calculation would make the price look very expensive.
2. The company seems to be more focused on margins than sales growth.The reason why companies shift focus from growth to margin expansion is only when they couldnt find new avenues for further sales and how does this impact the value of the company?Guess you guys are smart enough to figure it out
3.Finally,cmp seems more than fair and any negativr surprises in growth would only make thinga worse for the stock. Having said that,the returns for this stock are front loaded and there is hardly any scope for over performance vis a vis mkt from here,but if you are a long term investor who doesnt care about a year or two mkt performance there isnt anything to worry
3.I may look a little mean here but how long would buyers of garments,competitors,employees,and suppliers entertain an operating margin of 42% and a ROCE of 58%?

Disclosure: Not invested and not planning to invest even if it gets corrected by another 30%. (Below which will re-access the value with lower sales growth and adjust the returns to a more meaningful number and take a call)

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Kitex Garments Limited (27-10-2015)

Few thoughts:

1.A company whose sales growing at 11% is trading at a PE of 32.Isnt it pricey?Even a back of the envelope calculation would make the price look very expensive.
2. The company seems to be more focused on margins than sales growth.The reason why companies shift focus from growth to margin expansion is only when they couldnt find new avenues for further sales and how does this impact the value of the company?Guess you guys are smart enough to figure it out
3.Finally,cmp seems more than fair and any negativr surprises in growth would only make thinga worse for the stock. Having said that,the returns for this stock are front loaded and there is hardly any scope for over performance vis a vis mkt from here,but if you are a long term investor who doesnt care about a year or two mkt performance there isnt anything to worry
3.I may look a little mean here but how long would buyers of garments,competitors,employees,and suppliers entertain an operating margin of 42% and a ROCE of 58%?

Disclosure: Not invested and not planning to invest even if it gets corrected by another 30%. (Below which will re-access the value with lower sales growth and adjust the returns to a more meaningful number and take a call)

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S.H. Kelkar Ltd (26-10-2015)

Hi Nikhil,

Thanks for sharing the visit note.

The DRHP is a very good read to understand the fragrances and flavors industry.

The easy part first. Numbers.

As we can see from the stability in gross margins, it's a pretty good business. I think with increase in capacity utilization, there is a possibility of NPMs going up. But given that the volume growth is at 10-13%, not sure if we can see a big jump in operating leverage.

Market share looks great. Do you have any idea if this is based on production or sales? Usually, this is an approximation of sales, but I have heard that Nielsen also does based on production, especially in a predominantly B2B biz like SH Kelkar.

One thing which really stood out for me in the DRHP was below, and wanted to check if you have any insights/can check with the management/IR as you already visited them:

Why did Blackstone choose an unfavorable CCPS conversion (and that too as recently as October 5th)? What was given in return for this unfavorable dilution?

Of course, as with all IPOs, valuations are a bit expensive. But am happy such good businesses are listing in the secondary markets.

Disc: Not applying in IPO

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IDFC Bank – A Potential Compounder And A Blue Chip In The Making (26-10-2015)

Satya - What is now listed is IDFC. IDFC Bank - the demerged entity - will list first week Nov. Shareholders of IDFC got 1:1 IDFC Bank. Too much positivity on 2020 numbers ..:smile: yup. I like these guys.

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IDFC Bank – A Potential Compounder And A Blue Chip In The Making (26-10-2015)

Ratio based on 2020 projection is showing too much positivity!
Though, techno-funda is looking good to me. It had corrected and I don't think much downside left.

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IDFC Bank – A Potential Compounder And A Blue Chip In The Making (26-10-2015)

Dr. Rajiv Lall of IDFC Bank is as blue chip as they come. He said five years back that IDFC Bank would be created. He stayed true to his word and got the license. In the meantime, he has also steered IDFC and built it into an institution known for its values and capabilities.

In a banking system facing capital adequacy issues, this bank will start off well capitalised and with stressed legacy loans from IDFC well provided for. Its starting book value will be INR 40 and starting balance sheet around INR 70,000 Crores.

His central proposition for the bank is - lowest cost to income in the sector and a new generation technology bank which will attack the urban and semi urban and rural markets with differentiated strategies around physical branches. It will start life as a wholesale bank and an online bank and spread out.

Both in terms of business quality and management quality this is an interesting proposition. They might rewrite the banking rules in what will eventually be the third largest banking system in the world after the US and China in a few years from now.

Some very simple calculations indicate that the bank might list around INR 60 ( BV of 40) and based on industry averages of np / balance sheet could be quoting at INR 240 by 2020 based on their statement that they will grow the balance sheet to INR 2 Lakh crores by 2020.

S.No	Bank	Size Of Balance Sheet	Net Profit	NP/Balance Sheet	EPS	CMP	Multiple	
1	HDFC Bank	590503.7	10215.92	1.73%	42.41	1086	25.61	
2	ICICI Bank	646129	11175	1.73%	19.8	286	14.44	
3	Yes Bank	136170	2005	1.47%	50	725	14.50	
4	Indus Ind Bank	108724	1793	1.65%	34	939	27.62	
5	DCB Bank	16080	191	1.19%	6.8	138	20.29	
6	City Union Bank	27871	395	1.42%	6.7	91	13.58	
	Average			1.53%			19.34	
								
7	IDFC Bank in 2020	200000	3500	1.75%	10.33	227.21	22	
When IDFC Bank lists, its BV will be 40. Likely to list at 1.5 x BV which is a listing price of INR 60, making it a 4X possibility in 2020								
Balance sheet number of IDFC  Bank in 2020 based on numbers given by Dr. Rajiv Lal

Of course, execution risks in a highly competitive industry are a key risk.

Look forward to views of the experts

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