Hyderabad Industries: Stock Analysis for Long Term Investments
Hyderabad Industries Ltd (BSE:HYDIND) sells products in the building and construction industry. Its product range include Fibre Cement roofing sheets in the name of CHARMINAR, Autoclaved Aerated Concrete Blocks and Panels called AEROCON, Calcium Silicate insulation product called HYSIL, joining material for Gaskets, Plant and machinery for these products.
HYDIND is a part of C.K.Birla group of Companies. This group of Birla’s also owns the waning Hindustan Motors (i.e. Ambassador brand). My objective in this analysis to see if HYDIND is a good fit for my portfolio.
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 based on last 10 years i.e. from 2000 to 2009.
- Revenue: Increasing trend with average growth of 12% (SDev. 10%). It has volatility on higher side. Not a good observation.
- Earnings per share: It was negative until 2004, since then it continued to increase. On last 10 year basis, average EPS growth rates have been negative. However, since 2005 it seems to be a turnaround story. It is not a type of company I am looking for my long term portfolio.
- Net cash flow from operations: High variability in cash flow. Twice it has been negative in last 10 years. It could be due to cyclical business. Not a good observation.
- Profit/Loss from operations: Before 2005 it was negative, 2005 onwards its positive but lacks consistency. This again indicates towards turnaround story.
- Reported net profit: Same story; indicates some kind of turnaround message.
- Gross margins: Fluctuates quite a bit in last 5 years, from 5.2% to 12.5%. Lacks consistency. Not a good observation.
- Operating margins: Fluctuates quite a bit in last 5 years, from 7.5% to 16.2%. Lacks consistency. Not a good observation.
- Hyderabad Industries: Trend Analysis
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 less than 30%. Neutral observation.
- Dividend growth rate: No sufficient dividend history. Very different than EPS growth rate, i.e. no correlation. Not a good observation.
- Ratio of cash from operations to reported net profit: all over the place with no consistency. Not a good observation.
- Ratio of profits from operations to reported net profit: all over the place with no consistency. Not a good observation.
- Ratio of Cash from operations to total debt: Very high variability. Not a good observation.
Summary…
After going through this analysis so far, I do not believe HYDIND will fit into my long term portfolio.
- Prior to year 2005, it was in complete mess with all negative indicators.
- Since 2005, it does appear that company is on a turnaround path and has made some progress in that direction.
- The company was saddled in debt until 2004, and reduced significantly in 2006. However, the debt is again creep up. The cash it generates can barely keep up with the debt on balance sheet.
- Dividends and its growth is erratic and is not in-line with EPS growth rates.
- Most of the parameters are very cyclical, indicating cyclical business environment.
- In addition, my initial excitement turned into a concern after reading its 2008/2009 annual report. Enterprising investors who would still prefer to invest for long term should first read page 20 to page 23 of annual report. It shows the long list of dues and appeals it is in. If those appeals went against it, the company will have to pay a heft tax over time.
This is another example where, the current PE ratio, current dividend rupees, and current dividend yield appeared very attractive. But when we look holistically and then reflect it on company’s performance, one will find lack of good history and cyclical behavior. As I have said on many occasions on this blog, dividend investing is not about current yield. It is about sustainability and what future yield you can get.
One could argue that its focus in construction materials industry abodes well for future growth, which is in-line with India’s continually growing economy. It very well could be true and is surely possible. It is also possible it could be one of the turnaround stories.
I buy stocks with a view of holding it for 10 years or more. I expect to see consistency and sustainability so that I can get my returns. Hyderabad Industries falls short of meeting those objectives. I will not be buying any shares in this company.
Disclaimer: This analysis and conclusion drawn are in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Individuals should do their own analysis with their own objectives in mind.
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Excellent analysis.
Will post it to my Blog carnival on Sunday
just because their car factory does not work, does not mean HDIL will also not work. That is bad comparison. I do not agree that it is not a good investment.
I dont think Tip said its not a good investment. He said this does not suit his investment objective. In fact, he does say that this could be a turn-around story and could very be doing well in the future.
Cheers,
Arun
Hello Arun,
You got it right. Thanks,
Best Wishes,
Hello Shantanu,
I think you should read the analysis properly. As Arunsg mentioned below, I do not say it is a bad investment.
Best Wishes,
I agree with this analysis partially. This company is one of the best turn around story. The low PE suggets that its grossly underpriced. Fair value is 800 based on the forward PE for 09-10.
Hello Praveen,
Thanks for agreeing to certain extent. Even it is a turnaround story and assuming it can maintain it, and I have to buy it, 800 would be too high for me to buy for long term. Buying at 800 will not give me good returns overtime.
Best Wishes,
I would be willing to *sell* it at 800, though
.
Or, since Tip has done such a marvellous job on this blog, a special discount of 10% – just for readers of this blog : 720
Cheers,
Arun
Hello Arun,
So the readers get 10%, how much discount do I get?
Thanks for your good words.
Best Wishes,
I am not sure if you already scanned the following companies/assets. i would like to hear your view on GOLD
1. Binani Industries
2. karur Vyshya bank
3. SAIL
4. EID Parry
5. Praj industries.
Also what is your opinion on companies working in water processing industry like Ion exchange.
Hello Raju,
Thanks for your suggestion. Will look into these shortly.
Acknowledged on request for thoughts on GOLD. Will post it shortly.
Best Wishes,
To add to the list of companies requested to be scanned by Tip:
1. Orient abrasives
2. Graphite India
I had earlier asked for view on a few other companies, which for the benefit of other readers, I summarize Tip’s comments:
3. Numeric Power: Tip likes this from a financial angle, but too diversified. So, no.
4.Transformers & Rectifiers: Tip does not like it due to -ve cash flow in some years. Hence No.
5. Tilaknagar: Absolute no-no by Tip.
Cheers,
Arun
Hello Arun,
Thanks for summarizing here.
As a coincidence, I have finished Orient Abrasives (before I say your message) and will post it shortly.
thanks for other suggestions. will screen them and look into it.
Best Wishes,
Hi Tip Guy,
You did analyze Graphite India [& maybe my suggestion had something to initiate that!], but what happened on orient Abrasives?
Cheers,
Arun
Hello Arun,
Orient Abrasives – I did look at it and gave up. I should have at least summarized it (as promised!) to let others know why I gave up
. But I didn’t. Don’t ask why!
May be one of these days, I will list few companies which I gave up.
Best Wishes,