DHP India Ltd - Regulators and Fittings

[cool_aksh]

@cool_aksh

As of now my expectation is only that DHP will continue with its momentum and even this little growth in its topline would lead to much higher disproportionate growth in its bottomline which may trigger the re-rating of the stock while the downside will be capped due to its sheer under valuation.

The original hypothesis has played out very well thanks to the bull run and stock is re-rated and IMO fairly valued now. Would be interesting to monitor sales growth going forward.

Disc: Exited Fully.

[distilled_feni]

Q4 result summary.
Net profit of DHP India declined 41.63%. Primarily due to “other income” dip.
Highest revenue and highest operating margin quarter so far.

[distilled_feni]

From the AR 2018

[j2eeprofession_]

this is a standard note and last few years contains the same line.

[ramansharma]

Q1FY19 result summary.
Sales growth = 73 % (YOY)
Net profit growth = 8 %. Primarily due to “other income” dip. The other income was dipped in last quarter too. Can someone provide any info, what is the reason of this dip in other income??

Summary

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[Udai]

They have investments to the tune of 47cr in mutual funds and as per the new IndAS guidelines , they need to show the unrealised gains/losses from those investments as other income. So their mutual fund portfolio must have had a drawdown in the recent market fall. Its just notional and should recover its value by next quarter.

[muralikittu]

My understanding is that their other income comes from scrap sale of processed metals which happens from time to time and this varies between quarters

[suranjit_sarkar]

Few queries from my side. Anyone pls clarify.

1. In AR 2018 they have wrongly shown 1.2 cr as debt reduced(probably mistakenly) but total indebtedness increased by 1.2 cr from 1.7 cr to approx 3 cr.
2. They are making huge investments in MFs, additionally in tune of 8 to10 cr, but why taking WC loans from bank??
3. I think 100% of finished products are exported. They are only selling scraps in domestic markets and some kind of liscense. Anybody please clarify if I am getting wrong.
4. Their earlier company secretary Tarun kr Das resigned on 30.12.2017 and Internal auditor G.L. signhal and Co. also resigned. seems like a red flag to anyone?
5. As per RPT 1.5 lkh office rent paid to Dabriwala constuctions(Promoter group),why? Is there any lease agreements with them?

[dineshssairam]

Astute observations.

@suranjit_sarkar

In AR 2018 they have wrongly shown 1.2 cr as debt reduced(probably mistakenly) but total indebtedness increased by 1.2 cr from 1.7 cr to approx 3 cr.

Yes, looks to be that way. But the final value of Debt shown is correct. It’s just that they put it in the wrong intermediate column.

@suranjit_sarkar

They are making huge investments in MFs, additionally in tune of 8 to10 cr, but why taking WC loans from bank??

Considering how the company’s D/E is minuscule, I wouldn’t worry too much about this. It’s harmless leveraging. Even the Book Cost of Debt (Interest Paid / Debt) seems to be quite low (7-8%), which is fine. It’s easier for companies to raise a short term loan to handle day-to-day operations instead of selling invested securities day in and day out.

What you should be worrying about is the large MF investments themselves, in the sense that they’re not bad as such. But the question of redeploying the excess money still remains. This is my biggest gripe about DHP India and something I will be closely tracking for the coming years.

@suranjit_sarkar

I think 100% of finished products are exported. They are only selling scraps in domestic markets and some kind of liscense. Anybody please clarify if I am getting wrong.

Yes and no. Most of their revenues are from exports, but the ratio is around 85-15 for 2017-18, so the sale of scrap can also be considered as a regular business activity.

@suranjit_sarkar

Their earlier company secretary Tarun kr Das resigned on 30.12.2017 and Internal auditor G.L. signhal and Co . also resigned. seems like a red flag to anyone?

Looks like regular business activity to me, but I could be wrong. Here’s a profile of the new auditors (Search for Mr. Timir in specific). He’s audited FCI and SAIL before, so that might say something.

@suranjit_sarkar

As per RPT 1.5 lkh office rent paid to Dabriwala constuctions(Promoter group) ,why? Is there any lease agreements with them?

If my memory serves, Dabriwala Constructions Private Limited itself is a promoter of DHP India limited and holds >10% stake in the company. And once again, 1.5 lakhs is too immaterial to be considered for a company whose operating expenses are >40 Cr.

[suranjit_sarkar]

Thank you for clarifying the doubts. Highly appreciated.

It is just I am feeling anxious about both CS and IA resigning although nothing is mentioned in the reports and may be a routine affair.

Yes Dabriwala Constructions Pvt Ltd holds 20% of stake in company and 1.5 lk is immterial, but what I am concerned about is they have not disclosed any terms/notes for such RPTs in the ARs.

[KalyanKool]

Shareholding pattern is out. Looks like Rajiv Garg reduced stake to less than 1%

[Amitt]

Who is Rajiv Garg?is he related to management/Promoter group, and why is he
selling his shares at a time when DHP seems to be well placed to reap the
benefit of strengthening Dollar 85% revenue comes from Exports.

With negligible debt and growing domestic market,i believe this company should
do really well in long term. Even in current market mayhem this one has held on
pretty well.

[dineshssairam]

As per my understanding, Mr. Rajiv is a famous investor. He had more than 10% stake in DHP, which he seems to have reduced now. Not that any of this should concern us.

[nitinver]

The share has been pretty resilient in the current turmoil.How do you see the business opportunity in years to come.Would the same growth trend persist or are there any avenues that the company is exploring.

[dineshssairam]

LPG is a very good substitute for petrol as an energy source. In fact, it’s been used in many vehicles in the European region right from 1940s. Of course, it also has several other uses in cooking and home heating solutions, plus similar uses in the industry. My thesis is that LPG will naturally replace Petrol in some of its uses, if not a majority of it.

DHP being a niche player in LPG Regulators, should get some of that drift. The company isn’t doing any special CapEx right now, but is Operating at a high capacity if I’m not wrong. However, being a quasi-commodity business, we should pay attention to the Margins more than anything.

[nitinver]

Thanks, Dinesh.

One more q, is there any other competing co. in listed space.

[dineshssairam]

In the listed space, I don’t think there are other players. Here’s a list of all the approved players in India (Both public and private):

http://peso.gov.in/PDF/List%20of%20Approved%20LPG%20Pressure%20Regulator%20Manufacturers.pdf

[nitinver]

Thanks.

The Co. gives a picture perfect image

• small equity
• no equity dilution
• negligible leverage
• high promoter holding
• excellent return ratios
• no competing co. in listed space
• growing moderately
• free cash flow
• export oriented,which is a tailwind in current scenario
  is there something I am missing that is a major negative here?

[dineshssairam]

@nitinver

is there something I am missing that is a major negative here?

This isn’t a negative as such, but as I’ve expressed in this thread before, a bulk of their free cash is parked in Equity Mutual Funds. Unless they invest a majority of it in the next few years or pay it out, it could lead to what Warren Buffet called “the institutional imperative”. Or as Peter Lynch said “The bigger the cash build up in the treasury, greater the pressure to piss it away.”

The current price levels do offer substantial Margin of Safety from any surprises, but this has more to do with the management’s Capital Allocation skills.

[nitinver]

Thanks for your detailed replies.