Hello Everyone,
This is my first post here. Regret getting to know about this platform late.
I am a novice investor.
This is the first stock I picked up and have done a bit of research.
It would be great if all of you can share your inputs (criticism is much appreciated).
Introduction:
Rajapalaym Mills is the mother company of the Ramco group. The company makes quality yarn; counts from 4’s to 300’s and it has always incremented capacity to produce value added yarns like Compact, Elitwist, Slub, Gazzed yarn in singles and doubles among others.
Company’s performance:
During the last 5 years, the company has reported modest growth of 5.3% in operating revenues deriving 25-30% of its revenues from exports.
The company posted its best ratios in last 5 years in H1 FY 17 with RoE of 14.9%, RoCE of 13% and RoIC of 10.4%.
The company’s has been consistent in repayment of long term loans evident from Rs. 404 Cr in 2011 & 277 Cr.in 2016 and is poised to be free of long term debt by 2021.
Goes with the Management:
Competency - The Management has decades of experience and has established a brand name in the spinning industry.
Debt repayment - It has been paying off long term loans as per the repayment schedule . Infact, they have been paying off more amount as required in the schedule. This shows the serious attitude to run the business unlike many other companies.
Loan from Directors - The loan taken from the Chairman/MD are at average interest rates of 7.1/8.3% (last 5 years) which is in line/cheaper than loans taken from any financial institutions.
Goes against the Management:
Managing Director’s Remuneration - The remuneration paid to the MD as a % of Net profit for the last 5 years is ranging from 2.2% - 11.2%which is quite wide. A reputed peer listed company pays in range of 2.5-3.5%.
Promoter’s share holding - The promoter’s have pledged 28.05% of their holding which is not a good sign. The intent needs to be checked and the time frame for the release will also need to be assessed.
Related party transactions - There are a number of such transactions - the intent and the requirement needs to be assessed.
Interesting insights:
-
Capital Allocation - Business segments:
Surprisingly the company’s capital allocation is an area of concern. It allocates on average 80% of its capital in the textile business butthe windmill business has been generating higher return on capital - 15-20% and also contributing 50-60% of the company’s PBIT. Also contributing to this is the fact that there has been a growth in Income per lakh KwH generated has gone up by 9.3% CAGR over the last 5 years showing an uptrend in tariff rates. The company’s future allocations will be on the radar to see if it has any strategies in place for further growth justifying the deploy of capital. -
Stake in Ramco cements worth Rs. 3000 per share:
It has a 13.8% stake in Ramco cements with a market value of around Rs. 1750 Cr. along with stakes in other group companies implying a discount of around 80% to the company’s current market price. -
Statistics
The correlation between share prices of Ramco cements and Rajapalayam Mills in the last 5.5 years has been 0.65 and in the last 3.2 years has been a strong 0.91.
I do not understand what justifies the 80% discount to the market value of the investments.
Also I request the experts to please share your views on how can I improve my analysing skills based on the above analysis. @hitesh2710 Please share your views.
Disc: Invested a nominal quantity.