Bajaj Electricals Ltd: It is Light

For earlier post on Bajaj Electricals ltd Click here

As expected, Bajaj electrical has delivered great results in Mar-15 Quarter. Turnover at 1311 cr from 1271, almost same but NP at 47 cr from loss of 11 cr. I always prefer to use operating profits to make something out of a statement as it evens out the impact of debt and differential tax rates. Here its operating profit is at 70 cr from loss of 78 lac with its engg division has posted 20 cr operating profit from loss of 20 cr…big turnaround. I was putting my money on that….and it has done just that.

Now let’s view its return on capital employed. It has deployed a capital of 120 cr in Lighting and Consumer Durables division and operating profit of both is 165 cr…so an operating ratio of around 140% !!!

We take proportionate interest cost of 15 cr and tax rate of 30% and net profit now is at 115 cr….so return on capital employed is actually around 100%....just awesome. And it is not just an aberration but it is around this regularly. As I have explained earlier, it is because Bajaj has outsourced almost all of the production to third parties. It is just what Apple does…only designing and conceptualization is done by Apple in USA, the whole production is done in China…but maximum value is derived by Apple for conceptualization , designing and Marketing. If I am right, out of $150, china only accounts for $7 but does the maximum production.

Welcome to the new age of manufacturing where branding and designing are the biggest contributories to profits than manufacturing alone. This is “Production”. India too is realizing the difference between “Made In India” and “Make in India”. Indians are traditionally better than Chinese in branding and marketing. In China, a number of manufacturers go on producing the same products and you just can’t differentiate the producer as branding is at minimum. And Branding is a costly cost component.

Back to Bajaj, Indian Government is going to start bidding for its 100 smart cities. Bajaj is surely going to win huge orders. Bajaj Electricals has partnered with Cisco to jointly bid and participate to develop, deploy and promote smart street-lighting solutions. Cisco will manage the software applications and networking aspects such as routers and wireless applications while Bajaj Electricals will focus on advanced LED technology to install and service the street-lights.

Few years back, it implemented “Theory of Constraints” program to put its supply chain, inventory and distribution on track to minimize the blockage of resources and to channelize the flow of resources to eliminate the internal and external constraints to growth. This is yielding results as inventory levels are not high given its outsourced business model.

Last year its inventory was at 447 cr and turnover was 4000 cr. But consumer goods turnover was around 3000 cr. Finished goods inventory was at 390 cr. So just 13%...which is very good for an outsourced company like Bajaj. Recently, there has been much emphasis on supply chain and inventory control in india. As these can make or break a business like in retail excess inventories in one financial year can turn into obsolete stock in next financial year and can create havoc. So model is changing fast, with distributors leaving their old school intelligence of forecasting the demand and supply and then arranging the supply chain. Often company marketing team is seen dumping stocks to distributors for meeting sales targets. All this is horribly inefficient and a waste of costly resources.

Distribution channel should not be a costly factor in the whole process from production to consumption. If it is; then it will only lead to wastages of resources just like we see in our horrible agriculture distribution system in india which wastes 30% of the produce. Distribution is not just about transporting, storing and supplying; it is pure planning about how much to store. Distribution system’s role is to add value into the whole process and it will be adding value only when it is precise in knowing the quantity of stock required and at which interval. And for this, it should have the needle like accuracy levels.

If it acts like this, then it can save huge resources of the organization in the form of reduction in inventory, stucking of stock with distributors and retailers, obsolete stock, reduction in transportation cost etc.

Now a day’s companies are resorting to collection of daily sales data from distributors in order to make the whole supply chain real time and with this they can pick which product is not functioning up to the mark. With conventional system, often a non performing product is labeled as a failure on the part of distributor with no effort is being made to know the deficiencies of the product.

Bajaj Electricals was recommended around 220/- it touched 300/- after the results and now it is trading around 275/- It is still a great buy.

Regards

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

Indian Hume pipe Company Ltd and Monte Carlo Fashions Ltd.

Recently bought these two stocks. Full study is under progress, so just giving brief introduction on the business model of these two. These can be bought at current levels.

Indian Hume Pipe Company: Water is the next oil. World over, water levels and resources are depleting fast. In india, situation is worse. Over last 5 decades, per capita water availability has fallen 60%. Around 60% of agriculture land is rain irrigated; which is very risky and cause of low yield per acre. But even with 40% ground and surface irrigated land, still ground water levels are depleting fast. Around 90% water is left untreated which is the main cause of pollution of rivers. Water is not recycled at all. So this problem, if not treated in time, will become a time bomb.

So water related companies are natural candidates for investments. Big houses like Goldman sach, Morgen Stanley, Citigroup are buying big time water related companies, which are active in water treatment, recycle, Filter technologies, supply and infrastructure etc. we should not miss this.  I am having Va Tech wabag , invested at around 250 (Recommended at this blog also), Forbes Gokak (Eureka Forbes), IL &FS Engineering in water related portfolio. 

We have found another Gem; Indian Hume Pipe Company.People take it as another piping company...but piping is just 70 cr out of total turnover of 1000 cr...rest is pure water services related business.

It is around 90 years old company (1926) , given dividends for all these years except for 7 years, out of these seven, four were initial years.

It has got land parcels across india costing only lacs in balance sheet, but they are valued around 1000 cr which is more than it current market cap of 700 cr. very low debt, high cash. Order book is around 2700 cr. It has serious plans to monetize the land parcels. Recently it has entered into an MOU with M/s Sobha developers for developing its land parcel of around 27000 sq meters (around 2,96,000 sq feet as per land laws can be developed for residential purposes)in badarpur, New Delhi. Indian hume will get 48.50% of the revenue, while sobha will get 51.50%. Development and other project related costs will be borne by Sobha.

It is one of the very few Indian infrastructure related companies with low debt and have good amount of profits. It has earned a NP of 40 cr on a turnover of 1000 cr this year. Its debt is at 297 Cr. The only negative is high interest cost of 48 cr on this. But out of 297 cr, only 20 cr is for Long term, 277 cr is for short term working capital, which is adequately safeguarded by inventory and debtors.

So we hope that it will wipe out the debt with a single deal of land sale, which will significantly add to the NP. We entered at 290/- Current price is around 305/-

(Update Dec-2016: It has declared a bonus of 1:1, so adjusted recommended price after bonus is 152).

Monte carlo Fashions Ltd: its IPO was at 645/- , but then it slid to 450 and now at 540/- It is a brand known to all Punjabi's as we just love to wear its woolen clothes which are of great quality.

But It was looking good in every department. Like, It is excellent in Inventory management. Inventory is at 140 cr with turnover of around 600 cr, so around 20%. Our great giant, Page industries’s (Jockey) turnover was at 1200 cr in 2014 with inventory of 360 cr, which is around 30%. Monte is doing it because of full utilization of its production capabilities. Few days back one of my friend asked me that Monte never gave huge discounts even during off season sales. They usually give discounts in the range of 20% which is not big. Well, this excellent inventory management is the reason that it doesn’t have to dispose off excess inventory at discount. Its creditors and debtors are 84 cr and 90 cr, which is also good. Cash in the books at the end of 2015 is around 140 cr while market cap is around 1200 cr. Debt is manageable at 90 cr.

So in spite of looking great, I wasn’t buying it mainly because of one reason; in spite of good cash and profits, company has not declared dividend after Dec-14 results. But it did just that after Mar-15 results in June and declared Rs. 10/- as dividend which is around 37% of EPS of 27 of 2015. This is a very good sign.

It is investing big for summer collection business also which will even out its dependence on winter clothing. I am still to study it but it is just looking too good in some metrics like cash, debt and inventory management…because almost all of Indian retailers are too bad in all of these.

Current market price is 535/-

Regards

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

Jubilant Industries Ltd: It is Fevicol vs Jivanjor

I entered in Jubilant Industries at 84 in Apr-15. But as I was busy in annual account closing and audits, so I could not post the analysis in this blog and it just went above the roof and touched 170 in just one month. But after the recent fall in the market, Currently it is trading at 140/- I feel this is also a good entry price.

 This belongs to Jubilant bhartiya group…other companies related to the group are Jubilant foods and Jubilant Life sciences. It was under my watch for the last 3-4 years. It was a good profit making company but the problem started when it entered into retail sector with retail chain in Bangalore with the name of Hypermarket. It is posting losses since 2012 only due to the losses in retail business. Their other businesses are good and profitable. I was waiting for the moment when the company would do something for its retail division. Recently it has done a deal with Aditya Birla retail to sell its four hypermarket stores in Bangalore via slump sale for an undisclosed amount.

I think this deal will mark the return of the profitability and growth in its other businesses.
Apart from retail, it deals in Agri products like fertilizers, crop growth regulators and crop protection. It is one of the largest manufacturer of Super single phosphate fertilizer in india. For more details on fertilizers and SSP, kindly check my study on Coromandel in this blog. Its SSP fertilizer product brand Ramban is widely respected by the farmer community.

In food polymers business, Jubilant is one of the three major global suppliers of Solid Poly Vinyl Acetate (SPVA). Solid PVA is the major raw material for making gum base for Chewing Gum and bubble gum. Jubilant boasts of a customer profile which includes the market leaders worldwide, in the chewing gum industry. Some of these are - The WM Wrigley Jr. Company, Cadbury (The Kraft foods Company) & Perfetti Van Melle Company.

The Consumer Products business is focused on providing customers with a complete range of woodworking solutions ie adhesives & wood finishes, footwear adhesives and epoxy sealants under the Brand name of ‘JIVANJOR’. This is the business which I feel can be the game changer for the company.

Jivanjor is the second largest brand in the wood adhesive and finishing sector after Fevicol. But Fevicol is way ahead in terms of brand recognition and market share. Fevicol controls around 80-90% market share in wood adhesive sector in india. But Jivanjor is growing fast and doing some right things to gain the market share. Just recently I visited my home town Bhatinda in Punjab;  Jivanjor was visible in all the market at par with fevicol. Distributors and retailers are promoting it because of higher margin offered by it than Fevicol because product and quality wise it is no less than Fevicol. Carpenters are offering this to their clients because of commission offered to them by retailers as they can still earn good margin even after giving 5% to carpenters. Even we have used this in our house and it is just as good as Fevicol.

After the deal with Aditya group, Jubilant will be almost debt free and it can spend the money on brand promotion of Jivanjor, which is not visible in mainstream advertising world. It can plan better marketing strategy with additional funds.

Jubilant is having a turnover of around 850 crore. Agri products delivers 170 cr, Performance polymers (Mainly Gum and Jivanjor) 354 cr, Retail 335 cr. Operating profits are 4 cr, 23 cr and    loss of 70 cr respectively. As we can see, the losses are mainly from retail division. If we keep it out, then operating profits for Agri and Performance polymers business will be around 30 cr. Taking a tax rate of 30%, the net profit will be around 20 cr. Although due to accumulated losses of past years, it won’t have to pay any tax for many years in the future, but we are trying to be more conservative. If we assign this 20 cr a PE ratio of minimum 15 because of growing market share of Jivanjor (Pidilite has a PE ratio of 55), then its market value is coming around 300 cr. Although with better product mix and lean balance sheet, it will surely achieve greater turnover and profits. At 30 cr profits and PE of 15, Market value is around 450 cr…you take into account growth factor and NP is around 40 cr and it will become 600 cr. At current market price of 140, the market cap is 167 cr. The scope for increase in the market price is quite visible here.

It is having 300 cr debt in its books. Capital employed in Retail sector is around 160 cr. I believe it will be able to wipe out most of it after the sale. I do not have the data regarding the owned stores and leased stores for its retail divison.

Its agri divison will see better days after the current lull in Indian fertilizer sector is ended. India is heavily dependent on import of pulses due to inadequate production of these in the country as our farmers are busy in producing Wheat and rice only to let these rotten in the dirty warehouses of government agencies. The country annually imports about 30-35 lakh tonnes of pulses for around 15000 crores. India is the biggest producer of pulses in the world at 19 million tonne and their biggest importer. same is the situation for refined oil. SSP is a better option for growing pulses and oilseeds. 

Jubilant ranks No. 1 in India and is No. 2 globally, for manufacturing VP Latex used in dipping of automobile tyre cord and conveyor belt fabric. The Company also produces SBR Latex used in tyre cord fabric. The Company is bulk supplier of these lattices to global automobile tyre manufactures and dippers. The Company is also engaged in manufacturing of Indian Made Foreign Liquor (IMFL) products for the various established brands in India, engaged in liquor business. The capacity is 100,000 cases/month for IMFL. The specific details of these businesses are not available, but latex seems to be one with good volume and better future .

Good buy at current market price and at every fall.

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