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.
Ekansh Mittal [firstname.lastname@example.org]