Top 6 picks - zero debt firms for this high interest scenario

Stock Opportunities My Top 5 Picks
1

1.SKF India

2.Facor Alloys

3.Sonata Software

4.Tata Sponge

5.MOIL

6.ABC Bearings

more analysis in further posts :slight_smile:

2

Tata Sponge

Description

Tata Sponge is located at Bilaipada near Joda, in the
Keonjhar district of Orissa. It has a production capacity of
390,000tpa of sponge iron. The company has also set up
26MW captive power plants to gain from waste hot gases
released from its kilns.

Zero debt

ROE - 20%

ROCE - 25%

1> Radhikapur coal block to become operational by FY13. This will help dampen the impact of coal price hike.

2>Being a larger player, in better position to negotiate long term iron and coal contracts

Competition:

Monet ISpat

Godavari Power

**
**

3

ABC Bearing

OPM - 22.6%

PAT - 13.8%

P/E - 6.2

ROCE - 36.8%

Full Year Highlights:
Å Operating Profit was up by 51% Y-Y to 463Mn for FY11 v/s 308Mn for FY10. OPM up by 386bps to 22.6%
(18.8% - FY10)
Å Interest cost for FY11 reduced by 23% Y-Y to 5.4Mn as against7Mn for FY10.
Å PATmargins have increased by 127bps to 13.8% for FY11 from 12.5% in FY10
Å EPS reported for the year ended March 2011 was 24.5/- as compared to 17.8/- for the year ended March 2010
Å The company has declared a dividend of ` 6.0/- per share, translating to a dividend yield of 4.6%
Å Further on, ABCL’s Slewing Bearing Manufacturing facility has become operational during the month of March
2011

4

Facor Alloys

Most of the details and discussion on this stock has been updated at http://www.valuepickr.com/forum/untested-worth-a-look/46057716

My rational in short is as follows -

)- debt free firm

)- Mcap - 88cr

)- PE of 3

)- has 65 cr in cash ( 50 cr in cash and 15 cr in investment taken at par ) … stock ~ cash, making the EV < 25cr. Now the profit of the firm YTM is ~ 25cr. Hence you are picking up the stock for free

5

The other fallout of this high interest regime is longer credit cycles and consequently working capital cycles. Along with low debt one should look for companies with low working capital cycles.

How do your picks listed above fare on that front? Working Capital/Sales figures should do.

And then we should compare growth visibility. What kind of growth visibility is there -likely that a 20% grower would probably grow like 15%, all these stocks will face higher discounting too.

6

@TCX

Here is the working capital/sales data.


 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Facor Alloys




Total CL & Provisions 23.18 29.63 47.66 36.35 60.4
Net Current Assets 20.94 28.44 69.17 96.64 79.9
Net Sales 117.32 164.59 225.75 255.95 261.94
Working Capital -2.24 -1.19 21.51 60.29 19.5
Working Capital/Sales -0.0191 -0.0072 0.09528 0.23555 0.0744






SKF India




Total CL & Provisions 292.72 328.55 313.71 366.36 441.39
Net Current Assets 238.23 348.57 406.64 458.06 529.42
Net Sales ####### ####### ####### ####### ######
Working Capital -54.49 20.02 92.93 91.7 88.03
Working Capital/Sales -0.0405 0.01271 0.05675 0.05792 0.0424






Sonata Software




Total CL & Provisions 21.1 16.79 19.43 25.22 31.61
Net Current Assets 91.06 71.91 68.1 70.33 140.74
Net Sales 148.67 185.83 198.82 243.58 236.09
Working Capital 69.96 55.12 48.67 45.11 109.13
Working Capital/Sales 0.47057 0.29662 0.24479 0.1852 0.4622






Tata Sponge




Total CL & Provisions 71.2 100.13 147.55 108.13 127.31
Net Current Assets -21.43 39.09 61.59 104.3 92.02
Net Sales 193.03 285.7 456.65 609.34 519.94
Working Capital -92.63 -61.04 -85.96 -3.83 -35.29
Working Capital/Sales -0.4799 -0.2137 -0.1882 -0.0063 -0.068






MOIL




No Data










ABC Bearings




Total CL & Provisions 32.88 35.01 36.43 27.81 38.44
Net Current Assets 38.74 58.39 57 77.04 39.28
Net Sales 153.05 183.55 166.55 134.34 160.95
Working Capital 5.86 23.38 20.57 49.23 0.84
Working Capital/Sales 0.03829 0.12738 0.12351 0.36646 0.0052
7

Some issues with the data.

Working Capital = Current Assets - Current Liabilities or simply, Net Current Assets

So if Net Current Assets data is correct, just provide Net Current assets/Sales. Please convert that into % for better comparison.

Thx

8

Working Capital IS Current Assets - Current Liabilities … no mistakes there …unless the excel messed up.

I’ll try to put up the Current Assets/Sales soon.

About the growth visibility, Facor, MOIL and Tata Sponge would be affected by commodity cycle … so wont it be prudent to consider other factors for these firms?

9


Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Facor Alloys




Total CL & Provisions 23.18 29.63 47.66 36.35 60.4
Net Current Assets 20.94 28.44 69.17 96.64 79.9
Net Sales 117.32 164.59 225.75 255.95 261.94
Working Capital -2.24 -1.19 21.51 60.29 19.5
Working Capital/Sales -2% -1% 10% 24% 7%
Net Current Assets/Sales 18% 17% 31% 38% 31%






SKF India




Total CL & Provisions 292.72 328.55 313.71 366.36 441.39
Net Current Assets 238.23 348.57 406.64 458.06 529.42
Net Sales 1,345.12 1,574.90 1,637.55 1,583.23 2,078.07
Working Capital -54.49 20.02 92.93 91.7 88.03
Working Capital/Sales -4% 1% 6% 6% 4%
Net Current Assets/Sales 18% 22% 25% 29% 25%






Sonata Software










Total CL & Provisions 21.1 16.79 19.43 25.22 31.61
Net Current Assets 91.06 71.91 68.1 70.33 140.74
Net Sales 148.67 185.83 198.82 243.58 236.09
Working Capital 69.96 55.12 48.67 45.11 109.13
Working Capital/Sales 47% 30% 24% 19% 46%
Net Current Assets/Sales 61% 39% 34% 29% 60%






Tata Sponge










Total CL & Provisions 71.2 100.13 147.55 108.13 127.31
Net Current Assets -21.43 39.09 61.59 104.3 92.02
Net Sales 193.03 285.7 456.65 609.34 519.94
Working Capital -92.63 -61.04 -85.96 -3.83 -35.29
Working Capital/Sales -48% -21% -19% -1% -7%
Net Current Assets/Sales -11% 14% 13% 17% 18%






MOIL




No Data










ABC Bearings










Total CL & Provisions 32.88 35.01 36.43 27.81 38.44
Net Current Assets 38.74 58.39 57 77.04 39.28
Net Sales 153.05 183.55 166.55 134.34 160.95
Working Capital 5.86 23.38 20.57 49.23 0.84
Working Capital/Sales 4% 13% 12% 37% 1%
Net Current Assets/Sales 25% 32% 34% 57% 24%






10


Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Facor Alloys




Total CL & Provisions 23.18 29.63 47.66 36.35 60.4
Net Current Assets 20.94 28.44 69.17 96.64 79.9
Net Sales 117.32 164.59 225.75 255.95 261.94
Working Capital -2.24 -1.19 21.51 60.29 19.5
Working Capital/Sales -2% -1% 10% 24% 7%
Net Current Assets/Sales 18% 17% 31% 38% 31%






SKF India




Total CL & Provisions 292.72 328.55 313.71 366.36 441.39
Net Current Assets 238.23 348.57 406.64 458.06 529.42
Net Sales 1,345.12 1,574.90 1,637.55 1,583.23 2,078.07
Working Capital -54.49 20.02 92.93 91.7 88.03
Working Capital/Sales -4% 1% 6% 6% 4%
Net Current Assets/Sales 18% 22% 25% 29% 25%






Sonata Software










Total CL & Provisions 21.1 16.79 19.43 25.22 31.61
Net Current Assets 91.06 71.91 68.1 70.33 140.74
Net Sales 148.67 185.83 198.82 243.58 236.09
Working Capital 69.96 55.12 48.67 45.11 109.13
Working Capital/Sales 47% 30% 24% 19% 46%
Net Current Assets/Sales 61% 39% 34% 29% 60%






Tata Sponge










Total CL & Provisions 71.2 100.13 147.55 108.13 127.31
Net Current Assets -21.43 39.09 61.59 104.3 92.02
Net Sales 193.03 285.7 456.65 609.34 519.94
Working Capital -92.63 -61.04 -85.96 -3.83 -35.29
Working Capital/Sales -48% -21% -19% -1% -7%
Net Current Assets/Sales -11% 14% 13% 17% 18%






MOIL




No Data










ABC Bearings










Total CL & Provisions 32.88 35.01 36.43 27.81 38.44
Net Current Assets 38.74 58.39 57 77.04 39.28
Net Sales 153.05 183.55 166.55 134.34 160.95
Working Capital 5.86 23.38 20.57 49.23 0.84
Working Capital/Sales 4% 13% 12% 37% 1%
Net Current Assets/Sales 25% 32% 34% 57% 24%






11

Sonata software gets ruled out immediately. Only Tata Sponge appears interesting as normalised working capital/Sales is something like ~15. SKF India can also be considered, all others normalised levels are pushing 30!

by the way if Working Capital = CA-CL=Net current assets, why are you showing different figures for these two?

Of course, other considerations come into play. I will try and run a low working capital/Sales+low debt screen added to other criteria and revert.

12

Hi,

Amongst the above list, Tata Sponge, Facor Alloys & ABC bearing are indeed doing well and mostly debt free. Facor & Tata Sponge have significant cash on Balance Sheet also.

Thanks & Regards,

Ayush Mittal

13

@Ayush - what is you take on Facor and Tata Sponge ( Again!) taking into special consideration the commodity nature of business.

14

Both of them are undervalued stock ideas. Being commodity natured businesses, it tough to have much of concentration in them.

Regards,
Ayush

15

Hello,

I have done my analysis on Tata Sponge in my blog here

www.fingerscrossedideas.blogspot.com .

Let me know what you think …

Regards

Yogesh Bang

16

Isint Facor alloys in loss for past 3 years!

A share price is purely a npv of future earnings or more important dividends

I don’t see them turning around
Chinese are producing and dumping due to their state giving them subsidy
Difficult to fight them

I’d avoid for now

1 Like
17

@edwardlobo

the discussions were done in 2011 and at that point of time, global Iron Ore 62% and in fact all commodity prices and even the engineering companies were showing good promise.

At this point of time, the market dynamics have changed a lot and I feel ABC Bearings is the only one looking good in the lot. But even in here, I see Menon Bearings being in a good position to leverage on any upswing in auto sector.

18

Understood
Didn’t realise it was an old discussion
Hindsight is 20/20 anyone would have made the same mistake
Tata went on to acquire big steel companies based on same analysis