ABCIL – Is it a Turnaround Story?
Aditya Birla Chemicals (I) Limited, ABCIL, is a provider of chemical products like caustic soda, chlorine and its derivatives, and compressed hydrogen gas. Aditya Birla Group has a majority stake in this venture. Being purely in commodity business, it’s business model is to make money by operational excellence and economy of scale.
If an investor wants to buy shares in this company, it should be driven by quality of management. There is nothing unique about its business model, products, and/or market share.
Trend Analysis
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is from 2000 to 2009.
- Revenue: Overall an increasing trend since 2000 with average growth of 15% (SDev. 9%). Good observation.
- Earnings per share: Overall an acceptable increasing trend. High variability and has possibility of negative growth. Not a good observation.
- Net cash flow from operations: Overall an increasing trend. Has been above net profit. Good observation.
- Profit/Loss from operations: Overall increasing trends in profits from its operations since 2005. Good observation.
- Reported net profit: Overall an increasing trend since 2002. Good observation.
- Gross margins: Current GM of 27% is lower than historical average of 38.9% (stdev. 5.1%). Not a good observation.
- Operating margins: Current OM of 36% is lower than historical average of 45% (stdev. 4.3%). Not a good observation.
ABCIL_trendAnalysis_20100415
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.
- Dividend per share: Chart 3 shows dividend growth from 2004 onwards.
- Payout factor: This has been less than 10%. Not a Good observation. I typically like in the range of 10% to 30%.
- Dividend growth rate: Non existent dividend growth. Not a good observation.
- Ratio of cash from operations to reported net profit: It has been more than 1.0 since 2002. Good observation.
- Ratio of profits from operations to reported net profit: This ratio is more than one. Good observation.
- Ratio of Cash from operations to total debt: It was more than 1.0 for the first time in 2009. Neutral observation.
Dividend Cash Flow vs. Risk Free Savings Cash Flow
I did not do this analysis because I do not believe that ABCIL is a good dividend paying company.
Expected Beta-based Volatility
I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market.
- The stocks three year Beta value is 0.12, while it is 0.38 for last one year. This means this stock has low volatility w.r.t. S&P CNX NIFTY index.
- If I buy this stock, I should expect relatively lower degree of volatility when compared to NIFTY index.
- I am not calculating beta-based expected return. This is because; readers tend to believe that I am using this parameter to calculate my potential capital appreciation. In true sense, the only reason I use this parameter is to understand volatility. This helps me set an expected on fluctuations. It helps me gauge how it behaves relatively to my objectives of 12% to 18% consistent returns.
ABCIL vs. NIFTY Index
Fair Value Calculation
The next step is to estimate the fair value so that we can understand return characteristics for this investment.
- NPV price based on 15 year DCF: Rs 48.1
- Average high yield price calculated based on past 9 years: Rs 46.9
- Pricing relative to 9 year average PE ratio: Rs 79.0
- Pricing based on PE ratio of 12: Rs 220.8
- Graham number: Rs 205.5
The range of fair value is calculated as Rs 77 to Rs 120.
Qualitative Analysis
- ABCIL is not a typical dividend paying company that I have been discussing on this blog. The dividends paid by ABCIL are less than 10% of its income and growth of dividends does not exist.
- Tracing history of the company, I can see it was in mess. Loads of debt on its books, which exceeded its ability to generate cash. However, since 2005, there has been kind of turnaround. There is a consistent reduction in debt; it has maintained its margins and growth.
- With reduction in debt, I expect management will have higher earnings at its disposal. Therefore, in future, I expect management to increase is dividend payout beyond 10%.
- ABCIL is in a commodity business. This is typically characterized as low margins, no competitive advantage, cyclic, and capital intensive (in ABCIL’s case). This growth in this business model comes from economies of scale and industrial growth.
- Considering all these issues, I do not expect that ABICL will provide bumper returns. But I expect this stock to be a slow consistent performer of the order of 10% to 12% returns over a period of time. This assumes that management does not go bonkers and takes additional debt for expansion.
Summary
ABCIL is a commodity business and has a checkered historical past. It does not even pay good quality dividends. Contrarily, ABCIL has been able to generate consistent cash flow, diligently reducing its debt, and has good reserves. Is this a turnaround story? I do not know. This turnaround story will go for a toss if management takes another debt load for expansion. Interestingly, when the company was in mess, it was trading at PE ratio of 7+. However, when it has shown growth and prudent financial management, it is trading around PE ratio of less than 4.
I liked the fact that it has had good cash flow (and reducing debt load). I like the company solely due to the quality of management and its ability to execute in highly competitive business segment. I have taken initial starter position. This small position will allow me to follow ABCIL more diligently and keep track of changes.
Disclosure: I am long on ABCIL.
Disclaimer: This analysis is in the context of my long term buy and hold investment philosophy. It is in accordance with my investment objectives and my personal risk profile. If you intent to use this analysis for your own investment decision, then please make sure it meets your own objectives and your own risk profile.
ABCIL, ABCIL dividend history, ABCIL stock analysis, Aditya Birla Chemicals (I) Limited, caustic soda, chemical industry, chlorine, compressed gas
There is an anti-dumping/ safeguard duty on Caustic Soda imported from China which should be helping the company and its competitors. I don’t know how much % caustic soda contributes to the sales revenue of the company but this can be affected should the duty be withdrawn.
Hello Shyam,
I considered it, but decided not to touch upon that issue. Anti-dumping duty has been in place on Caustic Soda for almost all of last decade. Earlier of this decade, this duty was applied to European countries. In last few years, it has been expanded to include China, South Korea, Indonesia. So it is my view that it has been there for a while, it is not a new event. Prior to 2005, ABCIL was just not able to navigate through (even in era of anti-dumping duties). It is showing sign of turnaround likely due to change in management focus, expanding its customer base beyond Hindalco, and financial discipline.
I certainly believe anti-dumping duty helps. I also tend to believe that there are other factors of business management that is helping this noticeable change.
Best Wishes,
agree on your anti-dumping thesis….
But you posted elaborate discussion on why you did not like HDIL, even though that was turnaround story. You gave a message that you do not favor turn around stories, didn’t you?
Now on ABCIL, you seem to like its turnaround story. Isn’t this contradictory to what you presented few months ago?
Looks like I have woken up a nut job from his slumber. Let me wait and see if someone else ask me the same question. if yes, I will explain the differences….
have you decided to take me cleaners….. hey I am not bowling in IPL, take it easy! will you?
Tipguy Had tough time finding ABCIL on Indiabulls, could not find ABCIL on IB so spoke to a rep, even he could not find it, after 15 min of search he gave me the script name, the symbol was BIHARCAUST. Hop its the same company
Yes, it is the same company. Prior to 2009, ABCIL was Bihar Caustic. My apologies, should have included in introduction.
convincing analysis. but don’t you think this is value trap?
hey DS,
Can you elaborate why you think it is a value trap?
Hi
good analysis however you should always check for related party transactions
this firm is basically a Hindalco subsidiary (51% owned by Hindalco)
hence you need to see the net growth in sales and profit from non 3rd party sources to get an idea of whether it is a healthy business
Overall just see if the firm is just a side pocket for AB Group or a viable entity in itself
All the best
I live in US and just became citizen of USA. Is there a way for me to trade indian stocks online (we have many brokers in usa where we can trade online but i was wondering if i can do the same with indian markets)? thanks. can i buy/sell the same security same day? which is good site to follow stock prices and news regarding stock markets (in USA there is yahoo finance or MSN money that we follow but want to know about india). please advise. thx again.
Hello Superfly,
No, you cannot do intra-day trading from US. There are regulatory restrictions. However, you could invest or trade by availing “portfolio management services”. But again there are quite a bit of regulatory requirements/restrictions (relative to US markets). Just google for PMS services in India and you should be able to find more info on it.
For info on Indian markets/economy, you could use websites like The Economic Times or Money Control. Please note they are not exactly as yahoo finance or msn money. But they are similar.
Good Luck!