I have the full transcript of the concall. please pm me in case someone needs it. its not getting attached due to size constraints (283kb file).
cheers
I completely agree with Donald. I donât think people should âinvestâ into this stock at this time (i.e. put in fresh money). Once a stock falls 60% in a matter of days, it takes a lot of time to get the fear out of the minds of market participants. So, purely from a technical/market dynamics perspective, it is likely to take a long long time (possibly a few years) before it gets back to the 100 level again.
For those who are stuck with stock bought at higher levels, you can either wait for a bounce and then book your losses. The sentiment overhand is likely to be significant for a long time.
Disclosure: I hold the stock from higher levels and have averaged a bit at 47.7 levels. I am unlikely to buy more and more likely to book losses in the near future.
at the current time, i would not even look at it as a cyclical play. the reason for fall in price is heavy selling by some investors due to margin call on unrelated investments (this is an inferrence drawn from all public news available). the fear is that one is not sure when this selling will end, and is being reflected in the upâs and dips being seen in the price. the fall from 100 to 80 levels was more a recognition of the cyclical factors in play (in line with reducing results and numbers being reported by vehicle maufacturers). the fall from thereon is more specific to margin issues. in my opinion, once the fear of unknown (that is, how much more margin selling) is reduced, stock can move to its cyclical factored level of 80. hence this qualifies as a special situation at this juncture. discl. buyer at 50 with intent to add on dips.
it seems that the sale of these pledged shares seems to have got over by lenders,when stock will come to normal âŚor any other risk is there
Hi,
I was having a quick glance at nos to understand if there were some red flags. Must say that the P/L looked good and one couldnât have imagined such kind of cuts.
However few things which I felt are negative and want to take up as case study to avoid any mistake in future are:
1). Very frequent equity dilution. The equity capital is whooping 50 CR!! I think this might be the biggest negative as it shows that the co has been raising capital andfuelinggrowth
2). Low ROE at less than 15%. And if one combines this with the capital etc raised in past, it may mean that the returns are even lower.
Ayush
PS: Just raising the points for educational purpose and to avoid mistake in future.
2 Likes
Hi - fair point regarding equity dilution, and appears true specifically in CEBBCOâs case. Additionally, if we compare increase in equity with increase in networth and increase in net profits, then not all equity dilutions would be red flags. Raising equity at premium valuations (high PE) would add that much more capital to the company which would be used for growth (in this case, % increase in networth wouldbe greater than % increase in share capital). And if the company has been able to generate more profits from this capital (ie maintaining or increasing ROE/ROCE) then it can be considered as favourable dilution. Another use of new equity would be to reduce debt, which would have its own benefits by reducing interest costs and hence increasing profits, which will reflect in the return ratios.
Thanks Ayush,
Really appreciate your bringing this up - which is often ignored. Atleast this is not there in my mental patterns for sure, I missed that again.
Thanks Vinay for adding refinements, to make for a wholesome look at this aspect.
Please comment & help refine if following can be adopted as simple measures to check: (ofcourse assuming all other things being equal - i.e not highly leveraged cases)
1. Introduce a simple measure Equity Turns =(Sales/Equity)
what we usually look for is a consistent (somewhat rapid) uptrend. If we see a downtrend or an up & down trend over the years- that's a red flag - look deeper
2. Introduce next measure as Equity/(Equity+Reserves)
here we usually look for a consistent (somewhat gradual) downtrend, as addition to Reserves will normally be gradual
if there is rapid downtrend, then dilution (if any) may have happened at a premium and may compensate 1 above. Else there is significant jump in profitability/returns
A query for all:
If someone's equity base is very low like GRP's 1.3 cr , but generates close to 250 Cr Sales, that's a whopping ~200x Equity Turns
Shouldn't there be additional value accorded for someone generating Sales 200x Equity? Does this reflect very well on Management Quality?
Some example's to consider
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1 Like
Co had come out with an IPO @ 127 in sep 2010 n the price crashed post listing to 27 if I Remeber correctly. Lot of anchor investors like Kotak, Govt of Singapore had invested in it n they were left licki g the wounds. So they n other investors wud hv gone out by now.
Hence 15 year thump rule becomes very important to separate wheat from chaff. Further promoter reputation was not very stellar in UP specially the older generation who had to shell out a substantial sum to a prominent leader of now national fame on being held for ransom.
In India credibility n antecedents of promoter should be the first criteria to be carefully explored.
Hi Donald,
Happy to see you trying to put up the same in form of example 
But I donât think the above would be a right indicator. The above lesson was taught by Dad few years back - that look for cos which are giving out cash and not which require cash. In most of the big multibaggers who will find this hold right - like Cipla, GRP, Poly Medicure, Mayur etc. The logic is that the business is already good enough and it doesnât need capital again and again (they only need capital once in a while and that also is usually done by debt - remember debt is the cheapest form of capital if the business model is good and equity is the most expensive).
Hence if the equity capital structure is changing majorly or quickly again and again then one needs to be cautious. If it happens once in a while for some specific reason, then it may be ok.
The equity capital may rise by bonus which is good and the above table wonât reflect the same.
Regards,
Ayush
3 Likes
Hi Ayush,
We understand frequent equity dilution is not good. Using reasonable amount of debt is good as you can leverage the balance sheet - debt being cheaper than equity capital. Also as Vinay said if you dilute once in a while at premium valuations that is not bad, infact can be good.
My question is simply. There are many companies existing for last 10-15-20 years who have never diluted equity. But very few companies with as miniscule an equity base as GRP churning out 250 Cr in sales, or say 150x+ Equity Base.
As Vivek Bhauka has rightly pointed out, I understand itâs total shareholder Equity or Networth that we should consider. Sales/Networth may be a better measure or simply Networth CAGR or rather just Reserves & Surplus CAGR (because you started with that equity base anyways) will give a true measure of the real surplus CASH value that a company has added over the years.,
Please bear with me, but I still want to explore this part:)
All things being equal (Returns, margins, growth, BS strength, etc) Is there any extra value in buying a company with low equity base, but with Sales at say 150xEquity? Thatâs really the question because I donât think you can find many companies with that kind of a stat.
-Donald
Add Hawkins and Page Industries to that list both with equity turns > 60
Hi Donald,
The above thing which I mentioned helps in quick calculation/insight - that is the co actually making good money over long term or not. For eg in the case of GRP, as the equity structure has remained same over the years, one can very quickly understand that over a longer term of say 10 years, the co has done superbly. With the capital remaining the same, the reserves have jumped from 4 Cr in 2003 to 86 Cr in 2012! Plus over the years they have paid very good dividends...so the co has a good business model which throws out cash and they share it with minority too.
Now lets come to other case - Cipla:
Here is their eq structure over last
| Cipla Ltd | Equity History |
| Date | Equity | Remarks |
| 24-04-2006 | 155.45 | Bonus Issue |
| 18-04-2006 | 62.18 | Equity Underlying GDR |
| 18-10-1999 | 59.97 | Bonus Issue |
| 31-03-1996 | 19.99 | Rights Issue |
| 04-04-1994 | 18.65 | Bonus Issue |
| 06-10-1992 | 3.11 | Bonus Issue |
| 31-03-1992 | 1.55 | Rights Issue To Pref Share Holders |
| 01-12-1988 | 1.50 | Bonus Issue |
| 31-10-1986 | 0.75 | Bonus Issue |
| 31-10-1985 | 0.38 | As Per Annual Report |
Now its really interesting as the co started with just 40 Lac capital in 1985 and has created a 8000 Cr business and 7400 Cr reserves without diluting much of the equity over the years. Most of the increase in equity has been due to liberal bonus over the years (bonus is from reserves itself)
So what i mean is - that while looking at the co past track record, we should look at their capital structure too and try to get an insight if the co is increasing equity to raise money from time to time or not and also what kind of returns they have generated.
Ayush
PS: Hope I have been able to convey :-|
Hi Donald
Just trying to let my mind run free here. Just like in valuating companies we care less about yesterday and more about today. Shouldnt the same be for equity too??? Arenât the reserves equity itself in just a different account heading??? How does the starting equity matter??? Arent we most concerned about how they have are using the equity/funds presently available to them?
Krishna.
Lets look it another way. There are two individuals one who started his business with one crore [Mr. A] and another with ten crore [Mr. B] at different points of time. The individual who started business with low equity base grown faster and another with high equity base grew at a lesser rate [assume simply because ofaggressivenessor hunger to grow]. But now both networth has become equal and I have to take a decision in which company to invest. Certainly going by historical growth and performance I will prefer Mr. A.Theoretically, if everything remain same will I prefer Mr. A, yes.
But practically there will always be lot differences.I will also consider from now onwards how the future growth looks like, what are the respective plans for both of them. What are the growth drivers from now on. What are the valuations etc etc. So there cannot be any simple answer but I think it will depend on each case and where do you have more conviction. Whether you want to give emphasis on lower valuation or superior management quality.
reviously Donald wrote:
Hi Krishna,
Thanks for your free-flowing wonder/query. Keep them coming. as it makes us think with better clarity.
There is obviously no one ratio - that discloses all good/bad things. Each one individually points to something, and together they tell a story. It is good to have different ratios in my mental evaluation framework, so that my framework is more complete.
a) As you said it really should not matter whether how much of shareholder equity is in equity capital and how much in reserves & surplus. What matters is how much of incremental return on Equity is the company generatingâŚyou are right about that
b) Having said that, Ayush is the only one who pointed out to (what I consider a serious negative, when evaluating management) frequent equity dilutions. I missed that completely - although the data was plainly there before me to catch. There were several who had taken a punt/wanted to seriously take a punt who also must have also pored over the balance sheet. They raised other valid concerns.
c) I know why I missed this now obvious fact - it is simply not there as a mental pattern for me. I also have seen I can only get something in my mental pattern consistently when I calculate some ratio that points to it.
d) I found I could use Sales/Equity Capital - as a great pointer to quickly draw my attention to it. And the ratio quickly tells me a few things about management Quality - like GRP, and CEBBCO - two extremes of the situation. Which should be seen as a more capable Management - the answer is obvious
e) Besides in Indian markets - just like high Capex is misused - talk to any business owner and/or project consultants for such high capex industries - similarly frequent equity dilutions are seen as a red flag. Companies always diluting at high premiums and managing to grow much faster are exceptions (e.g. ICICI Bank) and there are a few others too.
My persisting with the ratio - was just to know from experience base of folks at ValuePickr - if there are more implications - because I havenât thought about/explored this aspect much - but I have always heard senior pros in the market attach a lot of value to a low equity base.
Just as an aside - think of GRP equity base 1.3 Cr; just go and check how many shareholders. If I am not mistaken there are just 30 shareholders holding >10,000 shares. If you continue to hold long term and GRPâs new business of Thermoplastics say explodes in next 5-10 years, that might be a very advantageous position to be in.
I like to keep an open mind and keep exploring why some pros do a few things. I know of a few who always target getting to 1%+ holding of a decent small company whose management they are familiar with and trust, with decent balance sheet, and decent growth visibility. They say this business ownership is for my next generation!!
I canât yet place many of these inputs in perspective - I canât say if this works better or that -but surely thesehave some use - and unless I keep playing with them - look at 40-50-100 examples I may never get to know:)
e.g. Vivek Bhaukaâs input of Low equity base leading to high EPS sensitivity - seemed to work for the first 5-6 companies I tried, but I tried it at CEBBCO with high equity base and there also it workedâŚso I am discounting it (low equity base I mean).
Thanks Vivek Bhauka - Itâs nevertheless an important observation - a 1% change in margin leading to 10-12% change in EPS. Probably linked more to the nature of the business/cyclicality, etc. In GRPâs case a 2-3% change downward in margin caused a stupendous 28-35% lowering of EPS. So now I know that when GRP does rebound- with demand returning - similar upsides will be there for a 2-3% change in margin. Now this is probably an important new pattern for me to keep in my head - and I have to thank Vivek for it.
This is digressing from the main CEBBCO discussion - but others/Seniors please freely add your observations/experiences so we can document some of these (after scrutiny)for benefit of the community.
Thanks
Donald
I find it pretty useful to look at a 10 year record of balance sheet to see how the Net worth has grown. If the Net worth has increased say 10 times in 10 years, a similar thing can be expected for future (of course validated by fundamentals etc.)
Since when we buy a share we basically buy a part of the Net worth, this tells me whether the Management has shown the capability to increase the Net worth and I can expect the same trend in the Market cap.
Also a simple glance at the Fixed assets whether the growth is fixed assets is higher than growth in Net worth implying capital intensive business⌠usually accompanied by increase in debt.
A lesser increase in fixed assets compared to reserves would imply the company becoming more efficient and would generally see reduction in debt/ increase in cash/investments.
Then I also check to make sure that equity part of the net worth has not increased.
What I learned from Ayushâs comments is that Increase of equity due to bonus issue is not a bad thing. Hence I would like to know from Ayush / others is how we can separate / identify companies that increased equity by way of bonus compared to those that raised fresh equity. Is it only by checking the corporate actions history?
Best regards,
Akbar
Agreed not a moat kinda business, ROE not too great eitherâŚ
But at less than 3.5 PE & 6%+ expected dividend yield, this is looking cheap. What say?
Hi Jatin
Donât go by just PE or dividend yield. As far as I am concerned, I believe its a pure cyclical play and not a structural growth story on increasing penetration of FBV. With CV sales declining in high double digits for the last 3-4 months [decline upto 50% for tata motors which account for more than 40-50% of CEEBCO sales] and none of the players see turnaround atleast for H1 CY 2013, I expect profitability might be in pressure in near term. Going for last 2-3 CV cycles, sales can continue declining in high double digit for upto one year.
Letâs see some past cycles
1991-93: Sales declined continuously for three years. Peak to trough decline was close to 35%.
1998-99: Sales declined for two years. Peak to trough decline was close to 50%.
2001: Sales declined by 30%.
2008-09: Sales decline for two years, peak to trough 40% decline.
Sales increased by high double digit (~30%) in FY10 & 11 and remained flat in FY12. Current downcycle begin from Mar 12 with 1% decline and after average decline of 10% during May to Oct 12, decline has accelerated to around 50% in Nov.
So going by past cycles decline in CV can be longer. [only indicating possibility, it might recover early]
In summary, it can be a good play on cyclical play on CVs. But if decline extended for next one year then dividend might be discontinued and with decline in profits PE might increase.
Disc: Taken a starter position. Not yet convinced fully of entry barriers and whether to what extent company can participate in growth whenever it recovers.
This is a cyclical mostly driven by unorganized players till now. These people also would have got into the business as they handle dealerships and hence would have been easy for them to handle FBVs.
However last yearâs budget made changes to benefit organized FBV players as sale of FBV benefits consumers. This has made them in a sweet spot where the declines of the M&HCV vehicles has not been affecting them. In an environment where M&HCV sales have declined drastically these guys have maintained FBV sales and improved margins. The sales has been restricted due to capacity. The macro picture for these guys are good.
The promoters understand that this is a cyclical business and hence are also looking at railway wagon business which is similar in nature. They went for a fungible wagon plant that can be utilised for FBVs as well.
There is no moat typically but in specialised needs like cold chain vehicles there would be an edge. The FBV can vary from Rs. 40,000 to Rs. 4l depending on the needs. Also, since the family owns dealerships they have got into replication business for FBVs which is a high margin business and not many organized players will have this advantage.
There is 23 cr. TRIFAC benefit to come in for the plant for 7 years. Previous numbers will not capture this. The return ratios would be improving going forward.
FBV is still an evolving business where Goverment as a stakeholder would be pushing organized players as overloading etc. hampers road and infrastructure. Earlier it was easier to get the chassis and build the body yourself but this trend would be changing.
Saurabh
These are extracts from what I posted on FBV a few days back:
First of all itâs the headline number of 20-25% penetration is the wrong way to look at it. The entire penetration is in tipper segment which account for hardly 20-25% of CV segment and trucks which account for 60%, penetration is less than 5% [Source for penetration no. Emkay global report]. Company derives 50% of its revenues from tippers and ~60% of its revenues come from Tata Motors [FY12], itâs near term performance is dependent on continued demand in tippers/Tata Motors. So in simple words it was and will remain a cyclical play till there isinstitutionalizationin transport segment like in mining and construction. Donât expectunorganizedsector to pay 30-50% premium to get the body work from organised player for sake of modest difference in excise duty and forgo option of overloading.
Railway wagon is still in initial phase and I think its a long way before it can contribute substantially to top line and bottomline to compensate for decline in CVs. Even if we assume it can, railway wagon industry future is not that great in near term. See the sales volume and share price performance of Titagarh Wagons. In the last call, company admitted that it does not have any pending order for execution.
Valuation wise, yes it looks ultra cheap and dividend yield looks attractive. But will prefer to see sales performance atleast for next 2 quarters vis-a-vis CV sales.