I agree that VSS is in highly competitive industry and not a long term story. But from medium term perspective, the negatives seem more or less priced in. However, I am not sure at what price one should make entry.
As per AR, The Company follows a LVCQSA strategy - Low Volume Critical Quality Special Application which gives it an advantage of less competition from mass players and increased loyalty from customers seeking stringent quality.
As per my calc - ROCE for FY 12 - 25 % , but if we take debt into account it will be higher. As the debt has been raised for expansion.
DEBT - 245 R
CASH - 87 CR
non current INVEST IN DEBT FUNDS - 83 CR
current invest in debt mfs - 18 cr
**inventory - 95 cr
POSITIVES ( in my opinion)
)- Company had reported an EPS of 14 for FY 12. As mentioned in AR due to plant upgradation / expansion work, revenue will be less in FY 13 due to plant shut down for some periods. After new capacity comes on stream and provided auto industry is not in trouble, the company should be able to improve earnings.
)- High promoter holding. Promoters of Vardhman Textiles hold 61%+ in the Vardhman textiles. They could have demerged the company VSS with every shareholder getting proportionate share in VSS. That way promoter stake in VSS would be 61%. Why would they care to increase stake to 75%.
-As per AR It is anticipated thatVehicle Production in India shall witness strong growth of 3.5 times till 2020 from 13.36Million units to 46.79 Million units. [Source: E&Y Report on âAssessment of CostCompetitiveness in Electric Arc Furnace v/s. Medium Blast Furnace Route for Steel Production.â] As regards, Indian Auto Components the demand is expected to reach INR 5.1-5.6 lakh Crores (USD 108 â 119 billion) by 2020 from INR 1.4 lakh Crores (USD 30 billion) in 2009.[Source: http://www.businessandeconomy.org/17032011/storyd.asp?sid=6008&pageno=1].
Hence, it is expected that the demand in the Auto Industry shall remain firm giving a
fillip to the Industry in general and Special Steels in particular.
-In view of the anticipated good demand, the unit of the Company is also planning expansion in its various operations in 2011-12 to increase its share in Low Volume, Critical Quality and Special Application segment besides increasing the capacity of its rolling products.
-Company has OEM approval from most of the auto companies.
)- As per AR thecompany has been the preferred supplier to leading companies like Telco, Ashok Leyland, Maruti, Hindustan Motors, Toyota, M&M and Escorts among others.
)- As per AR they need 130 cr for expansion. In my opinion the company will not need to raise further debt for present planned Capex. In six months upto Sept 12 qtr the total debt has reduced by 18 cr. Debt raised thru ECB route being cheaper option.
-Company is flwg conservative approach by recognizing forex loss on books but not the forex gain
)- Small cap, low liquidity
)- Cyclical business, commodity business, limited or no pricing power
)- Capacity utilization was almost 100% in Fy12, some part of production was outsourced. Expanded capacity needs to come on stream. After Capex , it is not clear that how much capacity will increase.
)- Unsecdured debt of 105 cr
)- Vardhman textiles is profit making and dividend paying company
)- Non executive Chairman -Mr. Prafull Anubhai (73) is a Corporate Advisor. He is associated with Educational Institutions likeIIM(A) Ahmedabad and is the Chairman of Board of Management of Ahmedabad University
MD - Mr. Sachit Jain (44 ) is a B.E. (Electrical) from IIT (Delhi) & MBA from IIM (Ahmedabad). He has over 20 years of experience in the Textile and Steel Industry.
Could not find anything negative about promoters.
-The company has one plant in Ludhiana and is into manufacturing specialty steel and alloy products catering primarily to automobile applications (and, also for Industrial, Defence and Engineering Applications to a limited extent).
The Company has its presence in different states across the Country presentlywith 6 branches and 6 warehouses.
)- Majority of expenses is for Power and fuel and then for raw materials. (iron and steel scrap and ferro alloys)
)- The Company has started the implementation of its Rolling Mill upgradation project with an investment of around` 130 Crores. Almost all the equipments have been ordered and it is expected to be completed by March-April 2013.With this project, the Company will be able to increase production, improve quality, reduce costs and improve customer satisfaction by reducing changeover time as well as adding to the product range.
-As the Country is witnessing the slow down in growth, the automobile industry has slowed down. This is having a serious impact on business sentiments for alloy steels also.
As a result, this year the volume will be under stress as also margins. In addition, there will be plant shutdowns which has to be taken for the Project. This will have an impact
even on margins. The Company hopes to recover its performance from the year 2013-14 onwards.
-The biggest risk the Company sees is that there could be larger than planned disruptions
in the project which could hamper current operations. Also, the current slowdown could get much worse which may further affect volume. The rupee may continue its steep fall
adding to the Company’s costs as lot of scrap is being imported. Also, this would increase the cost of ECB. To mitigate the above risks, the Company has appointed M/s Realization as Project Consultants who are one of the top consultants in the world in implementation of Project by using Critical Chain method propounded by Dr. Eliyahu M. Goldratt of ‘Goal’ fame. The Company has found their inputs quite useful while implementing the Rolling Mill Project.
Disc : not yet invested. Waiting for a further dip / another qtr of results. (hopefully poor results)