DHP India Ltd - Regulators and Fittings

Stock Opportunities Untested - but worth a good look
1

Hi All,

Initiating my first thread on Valuepickr. I’m looking to own businesses with a long runway for growth, small-medium in-built MoS and Market Cap <2000 cr for 10/20/30 years. Ran the following Custom Screener and it threw up 11 companies, of which 1 I’m discussing here.

Debt to Equity < .5
EV to EBIT <8
Dividend Yield > 1%
Market Cap <1000 cr
Sales Growth 3 years > 15% (think this is showing for 2012-14)
Profit Growth 3 years > 15% (think this is showing for 2012-14)
EPS > 15


The following information is from the 2013-14 Annual Report :-

CORPORATE OVERVIEW :
DHP India Limited is a Manufacturing Company of LP Gas Regulator (Liquified Petroleum Gas Regulator), its accessories and parts thereof. The Registered Office of the Company is situated in Kolkata & its Factory is situated in Howrah District, West Bengal.

FUTURE PROSPECTS
There is strong competition in the market. Your Directors continue to be of the opinion that high quality of products and innovations in products as well as improvement in technology along with cost cutting efforts will help your company to face this competition. The company is expected to continue to do well and improve further in the coming years .

MANAGEMENT DISCUSSION AND ANALYSIS REPORT OF 2013-2014

[As per Clause 49 of The Listing Agreement with Stock Exchanges]

TO THE MEMBERS
The financial statements have been prepared in compliance with the requirement of the Companies Act, 1956, and Generally Accepted Accounting Principles (GAAP) in India. Our management accepts responsibility for the integrity and objectivity of these financial statements, as well as various estimates and judgements used therein. The estimates and judgements relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflects in a true and fair manner the form and substance of transactions, and reasonably present our state of affairs, profits and cash flows for the year.

Apart from financial analysis, the management discussed on following areas :-

(a) Forward-Looking Statement : All statements that address the expectations and/or projections for the future, not limited to the Company’s strategy for growth, product development & innovation, market standing, expenses and financial results, are all forward-looking statements. These are based on assumptions and expectations in the future and the Company cannot guarantee its accuracy or its realisability. The Company’s actual results and/or performance will hence differ from those portrayed in forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise such statements on the basis of any future developments, information and/or events.

(b) Industrial structure and development : The Company concentrated on expanding the export market for its products and continues to do so.
(c) SWOT (Strength, Weakness, Opportunity & Threat) Analysis for the Company : There is a big potential of increasing the sale of LPG Regulators for the export market. The SWOT analysis of the company are as below :-

Strengths :
● Obtain various License and Certification for Exported Goods in various Countries as well as in
India for specific technical requirements and safety measurements.
● High quality and safe products at affordable prices.
● Ongoing product innovation and improvement.
● Strong and varied range of products as per requirement of varied markets.

Weakness :
● Time delays in procurement of raw materials.

Opportunities :
● Potential for expansion for diversified products.
● The future global market is very optimistic relating to LPG Appliances.
● Growing trend for consumption of Low Pressure Regulators & Gas Appliances.
● Expanding into newer untapped markets.

Threat :
● Rising price of Raw Materials & Components.
● Competitive environment with diverse players.

(d) Risk and concern : The Company is exposed to risks from market fluctuations of foreign exchange, interest rates, commodity prices, business risk, compliance risks and people risks. It is difficult to assess the risk involved in the business. It is always the intention of the management to minimize the risk involvement with proper analysis and market study & internal control systems.

(e) Internal Control and System Adequacy : Your Company believes in formulating adequate and effective internal control systems and implementing the same strictly to ensure that assets and interests of the Company are safeguarded and reliability of accounting data and accuracy are ensured with proper checks and balances. The internal control systems are improved and modified continuously to meet the changes in business conditions, statutory and accounting requirements.
The Audit Committee of the Board of Directors, Statutory Auditors and the Business Heads are
periodically appraised of the internal audit findings and corrective actions taken.
The Audit Committee of the Board of Directors actively reviews the adequacy and effectiveness of
internal control system and suggests improvements for strengthening them. The Company has a
robust Management Information System which is an integral part of the control mechanism.

(f) Operational Performance : The Company has already shifted the main focus of its manufacturing business from domestic market to the export markets and is confident of obtaining satisfactory orders in the coming years.
(g) Industrial Relation : The Company considers its human resource as the most valuable ingredient of the functioning of the company and utmost endeavor is made to maintain good relations with the employees at all levels

Now coming to the numbers :-strong text

CMP - 119.8
Market Cap - 35.94 cr
Issued Shares - 30 lacs
Promoter Holding - 74.37%

Debt to Equity - .12
EV/EBIT - 37.363 / 8.7559 = 4.27
EPS TTM - 19.23
P/E - 6.23
Divident Yield - 1.25%

FY’15 numbers aren’t as good as FY’14 with 20% drop in sales.

I have absolutely no idea about the business/industry and the management. Also, never done a scuttlebutt before. My basic inference is that it’s earnings shouldn’t be cyclical given it’s product offering. Looking for your opinions / comments on this one.

8 Likes
2

Hi Gurjot,

Thanks for posting this. I had looked at this company last year and if you go and see their sales number a big portion last year was scrap sales. We tried to understand this portion and the overall business, but the management wasn’t very forthcoming. We couldn’t put a finger on what are the growth drivers for this company and why would sales continue to grow.
Whatever little research we could do we couldn’t find any niche as such. Thus we passed on it.

3 Likes
3

@rohitbalakrish_ @gurjota
Scrap sales rose from 1cr to 10cr but Sales of LPG regulators, the main products, also rose from 25cr to 40cr.

4

DHP has been coming out with good nos. for last two quarters registering moderate sales growth with disproportionate growth in OP and thereby NP due to operating leverage kicking in. Though the company operates in competitive industry and opportunity size may be limited, It looks like a good short term value pick.

Q1FY17 nos in cr. (YOY).

Sales 10.77 vs 9.43
OP 1.21 vs 1.45
OPM 12.83% vs 13.46%
NP 0.63 vs 1.32

Q4FY16 nos. in cr. (YOY)

Sales 10.80 vs 9.62
OP 3.05 vs 2.58
OPM 28.24 % vs 26.82%
NP 1.69 vs 1.55

From Screener.in

Pasted image1041×265 43.5 KB

A very quick look at financial suggest that it’s quite undervalued despite churning out great return ratios for very long time. some back of envelope calculations…

Mcap = 40 cr
EV = 40.42 cr
TTM sales = 38 cr
Avg. ROCE (10 yrs) = 25%
Avg. ROE (10 yrs) = 18%
Liquid Assets = 9.19 + 2.32 = 11.51
Net Mcap = 29 cr.
TTM PAT = 5.6 cr.
Net P/E = 29/5.6 = 5.2x
P/B = 1.07
EV/EBIT = 5.28,
P/S = 1.04
D/E = 0.07

It’s regularly dividend paying company and has declared 2 Rs. dividend for FY-16 with ex date 9/9/16. For FY 15,14, and 13 it has paid Rs. 1.5, 1.5, and 1 in dividend respectively.

The mgmt has recently focused on export markets which makes for most of the revenue now. It they can get their acts together it may lead to higher growth.

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.

Disc: Accumulating

4 Likes
5

As the company is into Brass Products and Fittings, while cutting for finished products, whatever waste material is generated is what makes the scrap sales and is part of normal operating business and IMO should be treated as such unless there is a special case.

6

Hi @cool_aksh How has this number trended over the last few years? I think it de-grew by a fair bit in the FY15, how was it for FY16. Any reason why that would be the case?

If you think about the scrap sales, its a direct add to the profits and thus boosting profits. Scrap sales would be largely dependent on brass prices as well, I think. So need to look at that also.
If you look at it the company’s sales have declined from 50 Crores to ~ 39 Crores over the last 2 years. with margins and profits also declining. Q4 '16 was good in terms of margins. But why was that?

The positives are of-course the strong balance sheet and good historical numbers. Also the company is expanding capacity. The 2016 AR is yet to be out. Maybe some details will be there.

Just as a side note, I think the EV you mentioned is not correct. EV should be around 29 Crores. Market cap of INR 40 Crores - Liquid investments & Cash of 14 Crores less debt of 3 Crores.

1 Like
7

Hi @rohitbalakrish_,

If you look at last 10 year data, the company has grown its sales from 6 cr. in FY-05 to 49.5 cr. in FY-14 which was a peak from which it declined to 37 cr in FY-16 with OPM of 15.6%. All these years it has maintained OPM of around 23-24% in avg. barring years FY-06 to FY-09 when it was on an avg. 14-15%. The lowest OPM was registered in FY-07 at 9.5%. Currently on TTM it has registered sales of 38 cr with 15.8% which little over FY-16. For Q1FY17 and Q4FY16 it has registered little growth in sales with higher growth in OP and NP. For Q4FY16, RM has declined but in Q1FY17 RM has increased but still it has disproportionate growth in OP which is due to Operating Leverage.

From screener.in

Pasted image898×299 15.1 KB

So currently the company’s valuation is based on its depressed earnings which is also very lucrative. The mere fact that the company’s topline, margins and bottomline are depressed is a reason enough to believe that we should see improvement on this in future, looking at the industry the company operates in and its track record, which is validated in last two quarters as I am seeing improvements in all operating parameters topline, margins and bottomline etc. and I believe there is no reason why it should not continue. In fact, looking at their recent focus on export, it should rather do better than this.

As I said earlier, I believe the scrap sales is part of the normal business activity and so should of course be added to NP and I don’t see any issues there barring any special case where some old machines etc. are sold which is not part of normal business.

Yes, I’m also waiting for AR-16 to be out which hopefully will provide details with regards to future direction. What kind of expansion is being carried out? Can you please share the details? I didn’t notice this in the ARs.

To be on conservative side, I only add Debt to MCap to arrive at EV and I’ve taken data from Screener.in so yes you are right and there could be some error on that. At the EOD, “it’s better to be roughly right than precisely wrong”. :slight_smile:

1 Like
8

LPG regulator isn’t an annuity type product. i.e. people don’t have to keep buying this product at regular interval like an FMCG product. This isn’t even a product that people would want to upgrade like a car or electronics. They can only sell this product to LPG bottlers which are few. Growth will be driven by growth in new LPG connections which I don’t think will be more than 2-3% given the rise in PNG connections. There could be a good growth if their product is better than others but I think this is a mature product line and I don’t think market share gain or replacement demand will be enough to drive the growth into strong double digit levels.

This is more like a capital goods type product with limited growth potential. Such companies cannot be valued using earnings or sales multiples or discounted cash flow but mainly as a multiple of book value and growth rate of book value. At a p/b of 1.05 looks fair to me given the small size, commodity nature of products, limited customers and dependence on few products.

Just my quick thoughts, haven’t done a through research.

4 Likes
9

It’s of course not FMCG but CG nonetheless and is directly related to population growth and would also benefit from migration from conventional cooking energy alternatives to this cleaner, greener, efficient energy alternatives as I would presume many in India still use conventional stuff.

The customers are of course bottlers and are few and a sort of monopoly who in turn of course may squeeze a little bit on suppliers but when your clients are sort of monopoly the suppliers would also do well which IMO is amply reflected in their historical return ratios.

Regarding PNG Connections, Personally I think it’s hugely risky for consumers to opt for that and there are examples where in leakage in pipeline has resulted in loss of lives, what it works for is for the distribution of energy companies and they may push for that and may be a concern but that’s not happening overnight so we can relax on that.

IMO, there are many avenues in which company can try to increase its market share, for the time being, they have focused on export market for the same.

On valuation, it’s largely subjective and IMO hugely undervalued on all parameters imaginable and the nature of money being fungible that it is, when I get good return on my capital employed, I would be happy to buy such assets, growth or no growth.

1 Like
10

Valuations are very cheap. The performance parameters also look good (though there is a bit of drop in returns over the last 5-6 years. As you said, depressed earnings hence lucrative valuations)
But the main issue which i see with DHP is that it is not able to reinvest its surplus cash back into the business. This is evident from the huge rise in its current investments.
At the end of the day it is the ability of the company to reinvest its capital back into business at high ROIC that will create shareholder value.
It remains to be seen whether DHP can do this.

Disc: Not invested. Wait and watch mode.

11

The hypothesis has played out in expected line so far. For Q2FY17 (Sep-16 quarter) it came out with good nos. with all-round operational improvement inline with the expectation as follows (YOY).

Sales 10.10 cr. vs 7.63 cr. (up by 32%)
OP 2.47 cr. vs 0.61 cr. (up by 300%)
OPM 24.46% vs 8%
OI 0.19 cr. vs 1.79 (down by 89%)
Tax 0.74 cr. vs 0.08 cr.
NP 1.52 vs 1.82 (down by 16.5%)

NP looks down mainly due to higher OI and lower taxes during last Sep-15 quarter. Otherwise, operational improvement is inline with the expectation. Market also, as expected, seems to have noticed this operational improvement and price has seen sharp upmove and has held quite well during demonetization saga.

My expectation is that it should continue its momentum and come out with good operational nos. for Dec-16 quarter which shall help the fair price discovery of this yet undervalued stock.

Disc: Accumulating from lower levels

12

The hypothesis is playing out very well and the stock is re-rated. It would be interesting to see the Q3 nos. and market reaction thereafter.

1 Like
13

@hitesh2710 sir,

Do you track this business ? Your view on DHP India please.

Thanks in advance.

14

I happen to buy a small position at 150. Right now, my money is doubled in around 4-5 months.

I am not aware of business much, though I tried to find more information. I had written an email to the company, but haven’t received any response.

15

Q3 result has been superb and has even bettered my own expectation with all round growth and solid improvement not only on YOY but even on QOQ. With this it is already clocking one of its best OPM and if it continues this way, we may very likely see newer highs. At the same time, the stock is already re-rated a lot and not the same bargain as it was when I first posted my hypothesis, so a bit of caution is warranted.

16

Can i get a idea of what kind of raw material they might be using ??

17

you can look at the AR

18

Query - They posted Big Other Income. Any idea about it’s source.

20

Results are out. Muted sales growth and net profit down by approx 30% . Operating Margin is 6 odd percent compared to 13 QoQ.

21

Sales rise 3.30%

Net profit of DHP India rose 351.20% to Rs 5.64 crore in the quarter ended December 2017 as against Rs 1.25 crore during the previous quarter ended December 2016.

Sales rose 3.30% to Rs 11.89 crore in the quarter ended December 2017 as against Rs 11.51 crore during the previous quarter ended December 2016.

ParticularsQuarter EndedDec. 2017Dec. 2016% Var.Sales11.8911.51 3 OPM %25.4836.66 -PBDT7.402.90 155 PBT7.062.53 179 NP5.641.25 351
Powered by Capital Market