Vardhman Acrylics - A hopelessly undervalued stock


(Kamal Das) #21

Here is a recent report by Edelweiss on Vardhaman Acrylic

https://www.edelweiss.in/research/Vardhman-Acrylics-Ltd--Strong-Cash-Generation-Company/10005348.html

These guys are bullish on the stock.

Thanks for the notes Mr. Kale.

Yes, this is listed in onl NSE. My notes were off there! Apologies.

Generally, speaking I think its best to discount firm values by WACC, equity values by Cost of Equity and Debt values by bond yields of the company. As you point out in links as well Owner’s equity is similar to Free cash flow (with minor changes) Not sure why one would discount owners equity with bond value. Will look at the book and check.

@Mr. Singh. I believe NSE has better and more stringent listing requirement. Also in bear market, BSE stocks tend to be more illiquid making exit more difficult. As a result, I prefer to invest in stocks that are listed in both.

Season’s greetings and happy investing!


(Rupesh Tatiya) #22

In that case, how about Smartlink Network Systems? They pay dividends too.


(Hrishikesh Kale) #23

Thanks Kamal,

I am surprised why they are hoarding so much cash and not returning back if they are not expanding. Am trying to find that out.

BTW in the article they seem to be using the same convulated math that I was using for computing the ROCE of their core business.

Looks like they Edelwelss should hire some of our enlightened boarders hahahhaaha


(Pranav Singh) #24

HiHrishikesh, Thanks for correcting me on the listing oon NSE vs BSE.

Hi Kamal,Thanks for letting me know the reason of not investing in companies that are listed only on BSE.


(Vinoth Kumar) #25

Hrishikesh Kale,

It could be a Debt capacity + Cash bargain stock (applying the concept studied under Sanjay Bakshi). They can borrow at 12% ( Crisil AA- rated!), if I assume they can take a maximum debt which will yield an interest coverage of 3 (margin of Safety), they can borrow a debt upto 97 Cr. (EBIT/(Int.Coverage * interest rate). This when added with the current cash + investments could put the company at a potential of 297 Cr which is 5% higher than current market cap. (But this is too small a difference)

The company is available at a bargain price. If I take the FCF of the past 5 years, and assume no growth in the FCF for the prolonged period, discount it at 15%, I would get a value which is 380 cr which is 33% higher. Else, if I discount it at 20% I would get around 278 Cr, which is similar to the current range.

Catch here is the assumption of no growth. Will the firm be able to grow FCF at higher pace than 0% in the future? We need to be certain of that. This is one crucial question to ask, because, the companyas current valuation is dependent on discounted cash flow of future valuations!

http://www.textileworld.com/Articles/2004/September/Fiber_World/pictures/p71_Copy.jpg

Based on the above table, I see the acrylic fibre is not such an attractive option for growth in the past 20 years. The consumption and production hasnat grown over the past twenty years. The trend and the climatic condition could only result in the fibre consumption and production to increase. Also, China is planning huge investments in the space, which could result in supply overpowering the demand, by which the prices would be subdued. But I believe the companyas major source of income comes within India. Indiaas market is slightly deviating with respect to the global markets, but when there is an over abundant supply, there is a great chance the products from external markets coming into our country. In such a case, the competitiveness within the industry would increase, which too is not attractive.

Some other questions too I have considered exploring while looking at the companyas numbers, they are,

1)** What expense contributes the most for determining their margins? The Operating margins, seems wavy**

Margin reduction can be two folded, the price reduction or cost increase ( or both). Prices within Indian Acrylic fibre didnat decrease because this industry is growing at a higher pace than international peers, and there is a demand for the fibres, which results even in imports. Prices needs to be competitive, as low priced imports comes into the Indian markets. The cost increase might not be due the plant operations, as they might be operating at higher capacity utilization. Some external factors which determine the costs are,

Raw material a Acrylonitrile prices are directly proportional to Crude oil prices

Devaluation of rupee& reliance on external sources for procurement of raw materials

In the current context of falling crude oil prices and depreciating rupee, the companyas position is, I believe, wouldnat be much positively benefited this year. Anyhow, with the current industry structure, it is anyways better.

2) How are they generating more revenues, if their net block seems reducing every year? Are they due for an investment cycle?

They are not investing in expanding the capacities at all. The reason is unclear. In edelweiss report, it was mentioned that 20000 MT is the capacity of the plant. In the latest annual report they have mentioned their production during the current year is 20478 MT. It could mean they are operating in the shifts, as they have made no investments in capex. It could also mean that their plants and equipments would depreciate faster than they can anticipate. With such a condition the company would have to invest in the maintenance CapEx continuously, so that they can continue to operate at the same way. I sense a maintenance CapEx spends such as, replacing machines/equipments etc., would increase in the upcoming years, reducing FCF. A capacity expansion in this industry which is degrowing or growing slowly would only be detrimental. That would explain the following,

aAll management does is to be fairly interested in buying and selling of mutual fund/bond based investment vehicles.a

Summary:

Share valuation wise attractive. The opportunity for growth in earnings and Cash flows? Yes. But I am not sure on the sustainability of it. Hence, If I am investing, I would probably invest for the bargain it offers and expect to get something like 15-30% increase in valuation. Nothing more, nothing less. J


(Varun Darj) #26

Thanks everyone for the detailed post. I was going thru the FY 2014 AR in which I came across the following on page 39 of AR:

"The Company has given inter corporate deposits aggregating to ** 75,878.46 lacs** (Previous Year 53,288.00 lacs) to M/s VardhmanTextiles Ltd. during the year. The maximum amount outstanding during the year was 9,458.46 lacs (Previous Year 4,241.00__Lacs). The Balance outstanding as on 31.03.14 is Nil (Previous Year is ` Nil)."

  1. Given that its balance sheet size is INR 384 crs as of 31-Mar-2014, how can the company possibly lend INR 785 crs to its parent i.e. 2x its net worth. I understand from the Income statement that it realizes a interest income from this, but isnt this a Corp governance issue, or I am missing something here? Its not a one time activity, it seems that the company has done this even last year, if not more.

  2. The promoter of the group seems a very credible guy who was awarded the Padma Shri (3rd highest civilian order)

Would love to see other peoples thoughts on this.

Cheers!

Varun


(Varun Darj) #27

to add further, topline (Sales) is generated by selling and buying DEPB licenses for which there is no breakup of the revenue.

There is also a contingent liability of INR 60 crs of which LCs are INR 45 crs, wouldn’t this be an overhang?


(Varadharajan Ragunathan) #28

Varun

a lot of times padmashri is endowed on people who have been 'helpful" to the government - case in point - barkha dutt of nira radia tapes fame. I would not read too much into it - just because the entire world thinks highly, it does not mean that they are right - ramalinga raju was presented golden peacock award for corporate governance 1 month before the fraud was announced.

The only way to get this is to ask the company secretary - if there is no response or no clear answer, best to stay out of it


(bomi karkaria) #29

Varun, the figure of 758 cr is the aggregate of inter-corporate loans during a year, i.e. if a loan of 10 cr was given, and the recipient repaid the loan and thereafter another loan of 10cr was given, then the aggregate loans are 20 cr. This figure just gives one an indication of how often such loans are given to one related entity.

The figure of max o/s during the year quantifies the loan giving company’s exposure.


(Varun Darj) #30

Bomi,

I understand this… the interest received from the ICDs is 4.38 crores, so we divide it by the ICD rates in general say 10% (could be in the range of 9-12%) we get the average monthly exposure at any point in time as 4.38 cr/0.10 = ~44 crores which is like 25% of mkt cap… This sounds like a red flag! What this does is whenever Vardhaman Textiles (VT) wants to buy something from Vardhman Acrylics (VAL), VAL would issue ICDs and lend money on which it place an order for goods, VT would then take the goods and sell in the mkt and repay ICDs and keep the profit after deducting interest.

Positive here is that from fy 2014 it has put money in FMPs which I presume that it would locked in money and hence this sort of borrowing would not repeat in future --> Let me know if I am reading too much into this…

Also, since the money is now in FMPs, money has no plans of dividends, capex, expansion, it just wants to hoard cash…promoter is slowly buying from the mkt which means it wants to eat cash on VAL’s books by acquisition.

It also has a contingent liabilities of inr 60 crores of which 45 crs are LCs, which means that 50 of my mkt cap is shaky?

KINDLY LET ME KNOW IF I’M READING TOO MUCH INTO THIS? One of my friend has emailed the company, waiting for its answers


(Varun Darj) #31

Stock has moved 28-29 to 22.70…

Any thoughts?


(Brijesh Mahawar) #32

Thanks everyone for a very enlightening discussion.

1). I think you can trust the promoter if you take note from 58:00 to 58:45 of the following video:

2). Company is surely a debt capacity bargain.

3). If you look at the net operating assets of the company based on the September 2014 balance sheet it comes out to be 84.21 Crs. If we take PBT (trailing 12 m) of 46.41 Crs then PBT / Net Operating Assets = 46.41/84.21 = 55.11% which is very good figure (I have taken the current year number but this kind of exercise should be done with atleast three year average numbers as business fluctuations are high in this case). Although certainly there is much less predictability of the business in that case one can ask a high margin of safety. Point here is we have to first make our mind whether we are analyzing from a point of view of Buffett or Graham. Prima facie its a cigar butt.

4). Promoter increased stake in the company by more than 10% in the last two years and they have also done a buyback (although at much lower value compared to CMP) shows they are appreciating value in the company.

5). Why management is still hoarding that much of cash is the only puzzle. I think cash in this company is used as a stepney for working capital requirements of Vardhman Textiles.

…still researching.


(Shan) #33

BTW, the company declared a dividend recently and at approx Rs 29 per share, a dividend of Re 1 is pretty healthy, I’d say.

Disc: long


(Brijesh Mahawar) #34

Anybody attending AGM on 4th Sept ?


(venkat) #35

Hi

Just wanted to share my views on Vardhman

Recent Developments :

  1. Raw material price Acrylonitrile has fallen from Rs.134 per kg (incl. duty ) in Sep 14 to Rs.83 per kg in Sep 15 due to crude effect. ACN is 90 % of Raw Material Cost.

  2. Acrylic Fiber landed cost, as per import data is marginally down from Rs.180 to Rs.133 in the same period.

  3. Anti Dumping Duty - Govt has imposed Anti Dumping duty on Acrylic Fiber imports from Thailand of USD 162 per MT w.e.f 1st June 2015 for a period of 5 years. This gives additional margin / EBIDTA of Rs.10 per kg. Thai Fiber Imports account for 65 % of total Acrylic Fiber imports during FY 2015.

Cumulative effect of the above - Positive to VAL due to increase in margin and lesser import volume. EBIDTA for FY 2016 - Rs.65 cr + approx

Currently, ACN landed cost is Rs.93 per kg and AF is Rs.157 per kg factoring Customs and Anti dumping Duty.

As a result, Delta (Diff between RMC and Fin Good) up from Rs.39 to Rs.64 per kg.

  1. Promoter stake increased from 58 % to 75 % between 2013 and 2015 through Buyback and Market Purchases. A positive feature. Potential merger with Vardhaman Textiles owing to synergies?

Valuation :

Current market cap is Rs.240 cr. Cash equivalent as of 31st March 2015 is Rs.260 cr. Debt Free

Core business, EBITDA expected at INR 65 cr for FY 2016. Company available free Mcap (ex-cash).

Company has excellent Management Bandwidth, Debt free, cash rich, good EBIDTA outlook and very cheap valuation.

Something amiss ? Or is it a Hidden Gem?


(Bheeshma Sanghani, PhD) #36

The FCF is about 50 cr on a mcap of about 250 cr - thats a yield of 20%+ so thats as good as it gets. Sales are also twice its mcap & at about 500cr. a debt free company at 1/2 its sales & 20% cash yield. What am i missing man?


(venkat) #37

I totally agree with your views. Only negative I can think of is low or rather NIL growth in Acrylic business. Management commentary in the recent past also is silent on any expansion or growth plans.

In this scenario, huge cash is a drag as it delivers suboptimal returns. Inefficient allocation of capital by retaining idle cash .

But core Acrylics business looks good. Healthy margins and outlook also stable.

Someday, valuation will catch up. Until then, stay invested.

Sent from Yahoo Mail on Android


(atishay1) #38

Can anybody clarify what happened to other income on cash equivalents/securities which are on Mar 15 balance sheet. Not sure what they have done besides distributing ~9 Crores as dividends. Still there should be plenty ~300 Crores on the books, interest on which should have shown up in the income statements. However it has not been so.

Any cues?


(venkat) #39

My understanding is that this cash is predominantly invested in Debt funds (Growth) / Fixed Maturity Plans. Moreover to get benefit of Long term capital gains,these have 3 years maturity. Returns on these investments will get reflected in the accounts only at the time of redemption / maturity as “Profit on sale of Investments”. As these investments have not been redeemed, it hasn’t got reflected in the income statements during the current year.


#40

Again reviving an old thread…my understanding is that cash and cash equivalents is about Rs 34 / share. On top of this, they gave Rs 5 dividend last FY (because they don’t know what to do with the cash they are generating). At CMP Rs 47, it looks slightly undervalued.

Disclosure: Invested.