The markets are scaling new heights everyday and it is becoming increasingly difficult to find a bargainer in these times. I ran a screen and came across an interesting scrip by the name of- âIndian Toners & Developersâ. The company claims to be the largest manufacturer of toners in the Indian market. It also exports and derives ~ 40% of its sales from the export markets.
About the product and the company
Company sells compatible toner powder which is used as a consumable to re-fill toner cartridges and primarily sold in the aftermarket as an alternative to OEM toners or buying new toner cartridges. The company claims to be the one of the few companies manufacturing toner powder in India (the other company is Rathi- this is also listed) and other players are usually importing stuff and trading it. The company sells the following kinds of toner powder:
- Chemical color toner-
- Laser toner
- Copier/Digital Toner
- Wide format copier & printer toner
Almost all the raw material (petrochemicals) is imported. The company has 1 manufacturing plant in Rampur and 1 more plant through its subsidiary (more on this later) in Sitarganj, Uttarakhand. The company looks interesting because of the following reasons â
- Market leadership in a niche space âToner powder looks to be a very niche space, which is also boring. The company has been manufacturing this product for more than 2 decades and has created a name for itself. I did some scuttlebutt, and almost all toner-refillers knew about ITDL. Management interview in an industry magazine, mentions that the company has a very strong focus on quality which has enabled it to stay in the market and create a name for itself. The link to the interview is available here :http://www.indiantoners.com/pdf/recyclingtimes-coverstory-on-itdl.pdf
- Strong growth in bottom line-Over the last 5 & 3 years the company has increased its PAT by 31% and 35% respectively. EBITDA margins have expanded sharply ~14% in FY09 to 24.6% in FY14. During my scuttlebutt I got to know that ITDL products are more expensive that others. Usually the difference in prices is in the range of 25-35%. Gross margins have also increased by 2.5 p.points over this time. Another reason for the company for strong bottom line growth is scale benefits as there is a sharp decline in other costs and employee costs. The company also gets some tax benefit in their Sitarganj Plant in Uttarakhand
- Valuation âThe company as on 31st March 2014 has 35 Crores of cash and cash equivalents. It has profits of 11 Crores in FY14. The current market cap is 50 Crores. Net-net you are getting the company almost for free. The trailing P/E is 4.5 not excluding cash. The company has strong cash flows (19 Crs in FY14) and has also improved its working capital cycle.
- Export potential-Global market offers a large opportunity size for the company for growth
- Corporate governance: The company formed a subsidiary by the name of ITDL Imagetec. This is 51% owned by ITDL and 49% is owned by the promoter family. Now ever since the company started this subsidiary, majority of the growth and profits are coming via this route. My interaction with a company official mentioned that there is no difference in the kind of products that the subsidiary makes. Now this, prima facie looks to be a way of taking cash out from the company as there was no reason why the company couldnât continue selling its products in the holding company alone. Given this scenario, the question of how much of the cash will flow to minority shareholders like us, becomes crucial. The company has a very low payout ratio too.I have tried to reach the CFO over the last few days, multiple times but so far all efforts have been in vain. I spoke to Mr Rastogi in the company and he mentioned that the cash utilization will be towards capex. I will mail my list of questions to them, hopefully they reply.
- Competition:As per AR and also my scuttlebutt, the market is extremely competitive.End customers are mostly unaware about the goods and bads of any toner powder and price is the only determinant. Most refillers, sell the products which gives them the highest margins, which are usually cheap imported products. The only comfort that we can dervie here is that the company is reporting good financials and growth and is generating good cash flows.
Net-net I find many things interesting in this company- its in a boring industry, seems like a market leader, has good reputation in the market and is extremely cheap. The only thing I am unsure is the corporate governance issue, which is a binary decision for me. I just want to float the idea here and see if someone has looked at this idea before and what his/her views are.Given many things which are interesting here, I want to be sure, before passing on this.