Foseco India Limited engages in the development, manufacture, and supply of metallurgical chemicals in India. The company exports its products to Asia and the Middle East. Foseco India Limited is based in Pune, India.
I was attracted to Foseco by its high dividend rupees and dividend payment in each quarter. I love the fact that company gives dividends every quarter. This is the model followed by companies in United States. My purpose of this analysis is to see if Foseco will fit into my portfolio.
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 based on last 8 years i.e. from 2000 to 2008.
- Revenue: Increasing trend with average growth of 9% (SDev. 11%). This means it has had negative growth in recent past. Not a good observation.
- Earnings per share: Increasing trend with average growth of 50% (SDev. 81%). This means it has had negative earning in recent past. Not a good observation.
- Net cash flow from operations: Not a growing trend. Very volatile and appears out of control. Not a good observation.
- Profit/Loss from operations: Average performance with high degree of volatility.
- Reported net profit: Increasing trend. But the question is where profits are coming from because cash flow is very erratic.
- Gross margins: Very volatile and trending downwards. Not a good observation.
- Operating margins: Stable operating margins. I am intrigued by how it can maintain stable margins, when earnings per share are volatile, profits from operations are volatile, and cash flow from operations is not stable.
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 the profits with common shareholders.
- Dividend per share: Chart 3 shows dividend is more or less flat. Not a good observation.
- Payout factor: This is ratio of dividends per share divided by EPS. This has been consistently more than 50% (most of the time more than 60%). Not a good observation.
- Dividend growth rate: Not existent. No growth in last eight years. Not a good observation.
- Ratio of cash from operations to reported net profit: Volatile and trending below 1.0. Not a good observation.
- Ratio of profits from operations to reported net profit: This ratio is more than one. But I cannot explain this with other data points like less operational cash flow, less EPS, and no significant change in profitability. Not a good observation.
- Ratio of Cash from operations to total debt: This ratio is stable near one Good observation.
Projected Beta-based Expected Return
I measured Beta of Foseco’s stock 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 and how to factor in the capital appreciation into my expected returns.
- The stocks eight year Beta value is (0.07) i.e negative. This means Foseco is relatively very less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 6.4% relative to market index.
After going through this analysis, I am not able to understand how the company is making money, where is the cash coming from, where is the profitability coming from, and how it is able to maintain gross margin. It’s expected returns are very much lower than market. It returns 60% of earnings as dividends to its shareholders. With no debt and no retained earnings how will the company grow?
Foseco is the public limited company with majority ownership with its foreign parent company. The capital structure of the company shows 86.48% is owned by parent company. In 2000 to 2001 time period, the underwent restructuring where the company closed approximately three facilities, consolidated into one facility near Pune, and bought back majority of the shares from the common public. It is now taking away all the cash profits in the form of high dividend payout. I could not find company’s annual report or company’s future plans for growth in India.
This is an example where, the dividend rupees and dividend yield appeared very attractive, but balance sheet shows something else is going on.
I do not understand company’s future plans. I do not understand its balance sheet. I do not understand management’s objective. I will not buy common shares of Foseco India Ltd. It does not meet my investing objectives.
Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for Foseco India Ltd.
500150, Foseco India Ltd, FOSECOIND