Mazda Ltd - Sheer Undervaluation?

Stock Opportunities
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Small, little known engineering company from Ahmedabad, supplyingsteam jet vacuum systems and condensers for process and power industry. It also has a nascent Foods Division. Annual Sales ~90 Cr!

CMP: 94

Dividend Yield: 7.44%

RoCE FY11: 50%:

D/E: Debt free

Cash+ Investments Fy11: 22 Cr

MCap:37 Cr

**FY11 EPS: 43 **

FY11 BV per share; 136

OPM has moved up 2x in last 5 years : from 14% to ~30%

NPM has moved up 3x in last 5 years : from 7% to 21%

RoCE range last 5 years 33-44%

Now to bring back some sanity, FY11 results included Other Income of some 14 Cr on a Sales revenue base of ~90 Cr. The other income was from disposal of the Valves division. So all figures above, need to be adjusted accordingly:)

FY12 EPS expected to be around Rs 24, if the company matches Q3 results in Q4.

Positives:

1). Big performance jump in Q3. Roughly 1.5x previous quarters. Similar earnings jump

2.Commissioningof 4th production unit (Dec 2011?) is expected to add 20% to production capacity. That might be one of the reasons for the Sales spurt

3). Food division contributed just 4 Cr in FY11, but is growing at 30%

4). Debt free company, ability to fund growth

5). With 18 Cr investments in Short-term and Debt-funds only and no debt, Market cap of 37 Crores, the company is available for 18 Cr whose annual profits are 10-11 Cr

Negatives:

1). Stagnant Sales growth for last 3 years

2). Company performance is linked to Industrial growth - process and power plants, the outlook for which remain dim

The Annual Reports of the Company is good and explains lucidly its business environment and operational details. Looks to be a well-managed decent company. Last 4 years ARs are available

Any other overhangs? Is this a no-brainer, or what?

Can’t find the results of the company on BSE? Why? Company website shows Sep Qtr results

Writing to CS!

View invited. ValuePickrs should get to work finding more on the company.

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http://www.bseindia.com/stockinfo/anncomp.aspx?scripcode=523792

Sorry, Latest Announcements are available:)


Inauguration of new factory|28/03/12 15:30

Mazda Ltd has informed BSE that the Company has on March 28, 2012 inaugurated its new factory situated at Plot No. 17/1 , Phase - III, GIDC, Naroda, Ahmedabad. The factory will commence its production from April 01, 2012. The fourth production unit will add 15 to 20% to its total production capacity.

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Promoter has bought in Dec 2012 some 11000 odd shares for ~8.5 lakhs recently in Dec 2011 in off-market transactions at an average price-point of Rs. 75.

The stock has been available between Rs 70-90 over the last 1 year.

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Mazda discussion at Value-Picks blog.

Some details on business segments, etc.

)—

MAZDA LTD(Formerly Mazda Controls) is promoted by
Sorab R Mody with technical, Marketing and financial
collaboration with US basedCROLL-REYNOLDS.This US company
holds about 12% in Mazda. Company has two divisions
viz Engineering division and Food division.Under
the engineering division,company producing
various types of valves,steam jet thermo
compressors,Air jet ejectors,Evaporators
and Air pollution control equipments.Most of
these products finds applications in sectors
like ,refinery, power,petrochemical ,sugar …etc .
Croll Raynolds using Mazda as a sourcing hub
to meet its international demand which helps
the company a lot and expected to strengthen
this relations going forward.
Company has another technical
collaboration with Germany based Kauer
Engineering for Turbine Bypass
Valves and Evaporators. Almost all sectors where
companies products are using, are coming out of
recession globally.This situation will certainly help
the company going forward.

Mazda also having a food division
nullnullin which company makes products like
Instant powder drink ,fruits jams,squash,
custad powder,baking powder ,food colour …etc
under the brand name aBCOOLa.
Comapany is growing rapidly in this sector and expected
to grow 100% each in next few years even the base
is low at present. Company is now widening its
portfolio by launching Soya sauce, Tomato sauce,
Tomato ketchup and distilled vinegar…etc .
After a critical level achieved we canat rule out
a de-merger of food division from the company to
unlock value for the share holders.

Even in a difficult situation like
last FY company posted a sale of Rs.80 crore
and a net profit of 9 crore. For the nine month
ended in Dec qtr company posted a sale of Rs.56 crore
and a NP of 7.67 crore. Normally company is making
substantial profit from last qtr.On this basis company
is expected to post an EPS more than Rs.30/-
in FY 2010, which was Rs.22/- in last year.
Company paid a dividend of 20% last year and expected
to pay more this time.Last year promoter actively
purchased shares from the open market which is also a
confidence booster. At CMP of Rs.98/- it is trading
at a P/E of just 3 on the expected full year EPS
which leaves ample scope for appreciation.

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This is the detail I posted on TED back in Feb 10 if I recall correctly. I I made some good money out of it in the short term and then sort of lost interest in the stock.


MAZDA LIMITED. BSE CODE 523792

Mazda limited is an Ahmedabad based engineering company which manufactures different products catering to various sectors like Power,Fertilisers,Chemicals,Bulk Drug Industries, and also refineries,sugar,food,paper,pulp industries.

Mazda Limited is predominantly an engineering company producing different types of engineering equipments like vacuum systems, evaporators, vacuum pumps and different type of valves. The equipments manufactured by the company are widely used in the petrochemicals, power generation, edible oil extraction, steel manufacturing and other industries. The company is in production of the equipments as per the clients requirements.

The company has also started its food division which manufactures soft drink concentrates, essences and jams etc.

It has a strategic tie up with CROLL REYNOLDS US to design, manufacture and test various high quality equipments to different parts of world.

FINANCIALS

EQUITY 4.26 CRORES

DEBT 4.21 CRORES AS ON MARCH 09 (it has remained around these levels since past 5 years)

YEAR

05

06

07

08

09

H1FY10

9m fy10

SALES

32

37

53

67

87

34

58.85

NP

2.6

3.8

5

6.6

9.2

4.5

7.67

EPS

7

9.5

11.8

15.6

21.7

10.6

18

DIV

1.5

0.3

1.5

1.5

2

Figures in crores except EPS and Div(per share)

PROMOTERS STAKE IS AROUND 28.45% AS AT SEP 09.(SEP 08 WAS 27.46)

RONW IS ABOVE SINCE PAST 5 YEARS.

INVESTMENT POSITIVES:

Strong growth documented over the past 5 years

Cheap valuations at cmp 85 levels. (less than 5)

Low debt level.

The companyâs products cater to a diverse range of industries and hence risk of slowdown in a particular sector is mitigated.

RISK being low promoter stake and the sector risk itself, the company being in the small cap space.

Its venture into fruit juice space could be a diworseification although the management in the AR have reported doubling of sales within 1 year.

Currently valuation wise this stock looks quite attractive. Only thing the management needs to do to inspire investor confidence is to rake up dividends so that investors get to "see some money".

I guess these days there are too many promoters and companies sitting on piles of cash acquired by selling things and then not giving investors any clarity on how they want to get about spending the cash.

.

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Mazda write-up at Katalyst Wealth

Almost the same points raised as in original piece by you, Donald. We can invite Ekansh to share his further insights, here??

Before we discuss the finer details, hereas a brief snapshot:

  • Market capitalization a Rs 38 crores
  • Debt a Rs 17 Lakhs
  • Investments in Liquid Funds a Rs 13 crores (proceeds from sales of Valves division)
  • Cash and bank balances a Rs 4 crores
  • Receivables from Circor Flow Technologies (Valve Division sale) by 1st Juna12 a Rs 2 crores
  • Average cash flows from operations (post tax) for the last 5 years a Rs 5.7 crore
  • Average Net profit for the last 5 years a Rs 7.3 crore
  • Long standing dividend history, spanning more than a decade with the current dividend yield being 3.9%

So, the above figures do look interesting.Moreover, the company has been performing reasonably well with 20% annualized growth in sales during the last 7 years and even better 26% growth in profits on annualized basis over the same period.Most of the stated growth in sales and profits came during the period of 2004-08 with stagnation off late, however itas understandable given the fact that company derives more than 95% of its sales from Engineering division.

In the engineering division, the company focuses on pressure based systems (Vacuum systems and evaporators) and thus has to deal with relatively low competition (thatas what the managment says).Besides, the company recently completed the construction of the fourth unit of the company (an addition of 15-20% to the overall production capacity of the company) which should start contributing to the revenues of the company from Q1 FY 13.

The other business division i.e. the food division contributes about 5% to the revenue of the company. The company entered the food division business in 2008 solely for exports. In Food business, the company largely focuses on food colours and food essences under the brand name of BCool. As per the AR 2011, BCool has become supplier for many companies in the U.K. and U.S.A. Also, the company has started retailing BCool brand into two major supermarkets in the U.A.E. and with one major supermarket in the U.S.A.

From what I could gather from the site of BCool, the companyas main focus for BCool is private labeling (itas rather better that they focus on private labeling than compete directly with the big and established players of the industry).The company has stressed on customized packing and private labeling for all its products.

Overall, the company has been involved in reasonably good businesses with good growth potential. Moreover, the recent Deca11 results of the company have been very encouraging in terms of sales growth.

The question arises, is the market efficient in valuing the company at Rs 38 crores, especially when the company has performed reasonably well (refer the above details), holding close to 20 crore cash equivalents and generating close to Rs 6 crore net cash from operations, consistent dividend payout with ~4% dividend yield.

Now consider this, the company fetched Rs 20.75 crore from Sale of Valves division on 1st Juna10). For FY 08 (share of Valves division not available for FY 09 and FY 10), Valves division contributed 13% with sales of 7.91 crores towards the overall sales of the company, while Vacuum systems and Evaporators accounted for 85% (sales of 50.88 crores) of the sales of the company, while the operating profit margins of Valves division was slightly lower than the Vacuum systems division.

Assuming Valves division did well during FY 09 and FY 10 and recorded sales of Rs 12 crores in FY 10, Mazda could still get 1.73 times (121.73 = 20.75) the annual sales of the valves division and here we are getting for Rs 38 crore:

  • the Engineering division with 80 crore annual sales
  • Food division with 6 crore annual sales and marginally profitable and
  • close to Rs 20 crore cash equivalents

I am not sure if I am missing something (some negative news, bad corporate governance practice, etc), however on preliminary research couldnat find any such negatives and if there are no such negatives, the stock definitely seems mispriced.

Besides the above, the other major positive is the fact that Mr. Sorab Mody, MD and Promoter of the company has been increasing his holding in the company through open market purchases. During the calendar year 2011, Mr. Mody bought 35471 shares of the company for a total consideration of 30.57 lakhs at an average price of Rs 86 (CMP a Rs 90).

From the above, we donat find the stock a value trap, though would like to add here that we are still in the preliminary phase of research.

Best Regards

Ekansh Mittal [ekansh@katalystwealth.com]

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Hitesh,

Thanks for the inputs. Some observations & queries, for yr comments

1). The company seems better placed now than 2010? And Valuation-wise too it seems more delicious now than 2010? Available at the same price as 2 years back? Clear mispricing

2). The second part of the dividend should come to the company by June 2012, is that right? So chance of equally good dividend as last year?

3). The stock had touched a high of 142 in Oct 10, and then has gradually slided down, despite the big dividends. Was this in line with the overall markets, or was it the lack of growth and sector prospects?

Your insights will help greatly in rest of us coming to speed quickly.

Donald

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donald,

This was out of my radar since long probably bcos of other stocks being under focus.

A relook at Mazda shows it to be an attractive stock at cmp. Only concern is about clarity of growth that the company can achieve.

Plus the company seems to be too small to merit significant market attention unless there is significant small and microcap rally.

Downside looks limited but question remains how much one can bet on this one.

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Froma div yield perspective, looks decent short term buy. Get the dividend and get out :slight_smile:

Not sure how good the actual business prospects are. Engineering business wise I would much rather hold GEI Ind or Elecon in the small/mid cap space…

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Abhishek,

The normalised Dividend yield is like 3.5-4% only. Last year because of the other income from valve division sale proceeds, special dividend was added, as i understood from a quick look.

However there is another 4.8 Cr part proceeds from the sale. I think it is due in June this year, need to confirm that. so again you may get another special dividend. but you cant bet on it.

The call is on valuation mismatch, not so much on quality of its products vis a vis other enginnering bets, though the qualityb must be good enough as is evident from the margins.

Hitesh - can you look thru your notes, old data and try and answer Qns 2 & 3 asked for your insights?

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It corrects heavily after dividend payout.

One negative was the diversification in to unrelated area – foods division as the promoter’s daughter was interested in this division and it was loss making 1 year back.

Don’t know current status. Sold of in Oct 11.

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a few points:

1). the diversification in the foods section came after another division (pharma, i think) was shut down. the idea was to use the machinery and facilities. company is reporting encouraging response for its food products from middle east and other markets.

2). rest of the proceeds from the sale of the valves division is expected in June. I expect another special dividend.

3). management sold the valves division to diversify into the high margin vacuum process. management admits that it is difficult to break into the business. the management reported good inquiries for the same when I contacted them last year.

4). margins under pressure when raw materials go up, but management was confident of passing on cost increases with lag effect.

5). stock price could be falling because there is plenty of liquidity in the counter. promoter holding is around 37 per cent.

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1).

2).

3).

Coming to your specific queries,

1). Company may be better placed valuation wise, balance sheet wise than in 2010. The business it has left with it is higher margin business but one is not too sure about growth continuing. Plus any weak quarter can play havoc with stock price.

2). I wont be too excited about dividend bcos stocks generally tend to correct more than the dividend paid. e.g if one buys a stock at Rs 100 cum dividend of Rs 5 then what I have observed is that you often end up getting the stock at Rs 90 post it going ex dividend. I have seen this often enough. e.g Even in case of Mayur when the latest dividend was declared stock price hit a high of around 415-420 after which it went ex dividend and one could have comfortably bought the stock back at 385-390.

3). Regarding stock correcting I have no idea why it does so. One needs to see whether the momentum in sales and profits shown in dec is carried forward to the march and subsequent quarters.

But even with all these negatives and doubts I feel it might be worth taking a position in the stock at cmp as valuations seem to be quite attractive at cmp. How much to bet on it is one’s personal choice.

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How does this company pass the filter test of

  1. Size of opportunty & scalbility.

Does the promoter has the fire in the belly to scale it up in view of possibly no son as progeny .

How is the son in law is educated n qualified n his case came into family thru arranged marriage or was industrious enough to catch the bride thru love marriage route.

If its the former ala KP Singh of DLF & surnder kappor of Sonaa steering(son in law of raunak singh) the future is bright for the company.

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Hi Donald,

Read the10-11 AR today and have the foll possible negatives to point out. Some of them mayjust be my wrong reading ofdata and overlooking of facts.Will surely help me learn if you could check and respond

  1. Around 18 Cr is invested in Mutual Funds (I think this includes a large chunk of equity/growth funds aswell) of which 13 Cr was invested in 10-11. Would mark-to-market loss affect the Net Income this year considering what has happened to the nifty since then? Are these loss/gains reported quarterly?

  2. EPS decreased in 10-11 if you do not consider the valve bussell offone-time profit. TTM P/E is close to 5. Even if the com delivers same EPS as the stellar last quarter, EPS growth will be only 3% compared to 09-10.

  3. I am also not too confident about B-Cool and it could be a diworsification as Hitesh suggested in his old writeup. The 15 lacs profit reported in last AR as B-Cool segment profit may not mean that bus has turned profitable. An expense of Rs 854 lacs has not been alotted to either engineering or B-cool segments. Even a small fraction of this un-alotted expense can wipe out the profits of B-cool and land it in deep red. Further Capital allocation to this highly competitive bus may not be a good idea.

  4. Of the 22 Cr sale of Valve division 18 Cr has been received, so I dot not think the next small tranche will entail a sp dividend.

  5. Since steel is the main raw material and since growth visibility of target industries is less, would this com garner a higher P/E rating any time soon?

Thank You

Vinod

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Hello Donald,

Sorry for not replying your mail earlier but my hectic job doesn’t allow me to focus actively in stocks since some time. I am replying it here to carryon discussion forward.

I used to follow Mazda and made some money, got out ealier. I dont have much idea on business as of now but here’s what I think :

  1. I am not sure if company is better placed for growth. They expanded their capacity [15-20%] after long time of muted growth. Once they’ll have this capacity used [in a year?], they’ll again have muted growth. I observed that management are not too focused on expanding business proactively [eg: Suprajit] but here we do have passive management. There were some red flags with promoter’s daughter getting pushed against Mr.Percy.

  2. Dividend gives you comfort but then as hitesh mentioned stock also get corrected past dividend.

  3. Stock didnt move since last 2+ years mainly because of lackof growth. Market only pays for growth. However one can bet on this as cheap stock, good yield and wait for long time to get paid back but that depends on one’s investment strategy.

Most important question that we should ask is how much percent of portfolio can one bet on this? Afterall, it should make decent gains to make impact on overall portfolio.

I wouldnt bet on this one unless I am sure of the growth.

~Best,

Vipul

Hitesh,

1).

2).

3).

**

Donald

Coming

** queries,1. **

** price.2. **

** 385-390.3. **

** quarters.But **

choice.

**

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Hi Everyone,

Thanks for the responses. The interesting this is the last 2 qtrs…especially the Dec qtr. If the co can maintain the nos of Dec qtr, the stock seemsgrosslyundervalued and should do well. For next year, may be we can expect another 15-20% growth due to starting of their new factory in March, 2012.

Ayush

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Thanks Shivkumar, Vipul and Hitesh for bringing everyone upto speed.

The picture that emerges:

1). A decent company with good returns and margins. Debt free, good dividends.

2). Valuations are attractive at this point

3). Growth track record isn’t impressive, but recent uptick in growth 15-20% plus may be sustainable, needs watching, especially with new factory commissioning by March 2012

No major downsides can be seen from current levels. Visibility may improve for next 12 months.

This looks like a decent candidate to compile a set of questions for Management, and take forward to better understand near & medium term visibility.

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Hi Donald,

Pls have a look at my post a few days back. Would be great if you could respond to it.

Thank You

Vinod

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Hi Vinod

Very rare that you will find a completely unblemished picture - we should not however miss seeing the big picture - assess where the odds lie - what is really important to focus on, and what can be ignored!

1). The Investments are pretty safe. Out of 18 Cr, 14+ cr are in Short-Term debt funds. The balance is with equity funds with a pretty good record such as HDFC Equity, Franklin Templeton,etc. I do think there is solid value in these investments - and they are pretty liquid.

2). BCool is not a significant segment right now. Shivkumar has also informed us about the necessity of the move. I think we should give some time for this to play out, results so far have not been bad.

3). Valuationwise - the mismatch is more on account of the low Marketcap vs Cash on books and low debt. look at it from EV/EBITDA rather than PE

We should evaluate based on FY13E.My real interest in this stock is the growth spurt in Q3. If this sustains, than 12 months from now, this company is on a very solid wicket.

Does it not make sense to establish the sources and quality of this gorwth spurt? Can it be sustained? What are the demand-supply equations now? Is the company hampered by production constraints, or by demand on the ground??