DCM Shriram Conslidated

Note: i have written this in Dec-12. Current post is just a re posting of the old one.

DCM is a 5000 crore turnover company with main focus on Chemicals, Sugar, Farm inputs and hybrid seeds. It is available at market cap of 1100 crore. How much value is hidden in this stock can be gauged from the fact that it has around 283 MW captive power plants. If we assign moderate valuation of 5 Cr per MW...it is coming around 1400 crore!!!

It did have PPA with state Govts for around 51 MW at 4.11 Rs per Kwh. 

Under its chemicals business it is manufacturing Caustic soda and chlorine which finds its use mainly in textiles, paper and soaps with turnover of 1600 cr in 2011-12. It is one of the oldest in india. But power comprises almost 60% of cost of production of these and with coal prices at all time high, this could affect the margins like it did in 2011-12. However is developing a lignite mine for its power plant at a cost of around 80 cr which could suffice for around 10-15 years. lignite is a cheaper source as compared to coal and they are about to open the mine around dec-12, so this can improve their earnings much better because prices of caustic soda are ruling at all time high.

Hybrid seeds Business is under its subsidiary Bioseed...which sees its turnover jumping from 151 cr from 2009 to 391 cr in 2011-12. This can be the biggest game changer for the company as company is expanding big time in various geographies around the world and within house research facilities which is recognised by Indian research organisation and also gets funding from govt for its research.

It invests 10% of its turnover for research. Its mainstay is hybrid seeds for wheat, cotton, corn, rice, tomatoes, watermelon, chillies etc. It has introduced Bt cotton in india but couldn’t launched BT corn in india due to Govt control...but it has launched Bt corn in other countries after getting the technology from Monsanto. However Hybrid rice can be the greatest bet because in india only 3% of 110 Million acres of rice cultivation area is under hybrid seeds where production is at 6 tonnes per acre as compared to 4 tonnes for conventional seeds. India saw the great jump in its cotton and wheat production once hybrid and GM seeds were introduced. China has around 60% of rice acreage under Hybrid seeds.

It is also developing hybrid tomato seed which increases its shelf life considerably in partnership with USA based arcadia biosciences.

Under sugar it is having a listed company DCM Sugar with turnover of 900 crores...decontrolling of sugar prices and fixation of alignment of ethanol prices with international oil prices can increase the margins of the company.

For its Farm inputs business it is having a turnover of 1100 crore. it supplies urea/fertilizer, micronutrients. With fertilizer decontrol under consideration for long it will also be one of the main factors for growth in future.

Its other businesses which are at small scales are cement with turnover of 150 crores which gets raw material from its chemical division, Fanesta building systems which manufacturers UPVC windows and doors, a small textiles division.

Its debt was at 1615 crores in Mar-12 which has now reduced to 1400 crores....i feel management can sell its small business units like cement/Textiles to cut debt. I don’t know if they have any plans for doing that.

Hariyali Kisaan Bazaar: this is the rural retail arm of the group with around 300 stores around india for small villages which sells multi branded agri inputs, FMCG products etc. However this isn’t performing well since its inception with losses of 105 cr in 2011-12 which was the main drag on its net profit. I have seen that somehow Indian companies are unable to break the code of success in retail business with every retail chain staring at losses.

I think it is because of cultural built of india, too high cost of real estate, blocking of working capital on unnecessary items like i’ve seen electronics goods segment in reliance retail which is a sheer wastage of money. To buy TVs, fridges etc nothing is better than dedicated electronics shops or chains than these Khichdi stores which can’t have the varieties which we as customers love to choose from. There is no sense in blocking capital in these. Inventory turnover ratio at most Indian chains like pantaloons is around 150 days against 30-40 days of Gods of retail like Walmart.

But Management has taken a wise decision to close all the stores except 37 which are only selling fuel for which DCM has contract with BPCL which is a good margin business. For its stores it is having 180 acres of land out of which 15 acre is occupied by 37 Fuel stores, remaining 165 acre will be sold off to cut the debt. The value of these assets will be around 200 crores.

DCM is having around 16 crores shares, so even if we leave the losses from Retail it will add around 7 rs to EPS. Currently it is at 67/- it is one of the best buy at present and at every fall.

Regards

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)