Visaka Industries – Fairly Priced for Long Term Prospects

Visaka Industries Limited (VISAKAIND) is a Hyderabad based company engaged in two businesses viz., Building Products and Textile Synthetic Yarn. Building products include cement asbestos, accessories, non-asbestos flat sheets – used in roofing material and interiors, V board panel made from cellulose fiber and inorganic silica binders. Textile Synthetic Yarn products include blends of polyester, viscose and related material sets – used in weaving of fabric. These yarn products are used in manufacture of shirting, suiting, fashion fabrics, upholstery and embroidery laces. Recently, Visaka has also entered in power generation, but it is not expected to have any impact on results for another few years.


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 2001 onwards.

  • Revenue: Overall an increasing trend since 2001 with average y-o-y growth of 21% (SDev. 15%). Slowed down in last two years. Good observation.
  • Earnings per share: Overall an increasing trend. Significant drop in 2008. Need to understand why? Good observation.
  • Net cash flow from operations: Stable for few years, but volatile in since 2007. Overall, it has been above net profit. Good observation.
  • Profit/Loss from operations: Overall increasing trends in profits from its operations. Good observation.
  • Reported net profit: Overall an increasing trend. Significant drop in 2008. Need to understand why? Good observation.
  • Gross margins: Current GM of 16% is higher than historical average of 13%. Good observation.
  • Operating margins: Current OM of 19% is higher than historical average of 16%. Good observation.
  • Net margins: Current NM of 9.5% is higher than historical average of 6%. Good observation.

Visaka 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. It 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 2001 onwards.
  • Payout factor: This has been lower than 30%. Good observation.
  • Dividend growth rate: 18% average growth rate. Good observation.
  • Ratio of cash from operations to reported net profit: Overall, it has been more than 1.0. Good observation.
  • Ratio of profits from operations to reported net profit: This ratio has been more than one. Good observation.  
  • Ratio of Cash from operations to total debt: This has been, consistently, less than 1.0. Not a good observation.


Dividend Cash Flow vs. Risk Free Savings Cash Flow

Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 3.2% at current price of Rs. 157; and (2) average savings interest rate is 7%.

  • Best case scenario: considering historical average dividend growth rate of 22% for last nine years, the dividend cash flow will be 1.5 times the cash flow from savings interest.
  • Worst case scenario: considering my expected low end of the dividend growth of 8%, the dividend cash follow will be only 0.5 times the cash flow from savings interest.
  • At today’s high price, and worst case dividend growth rate of 8%, my expectation is the dividend cash flow will not exceed saving interest income in 10 year time period. Buying at Rs. 80 or below will provide dividend returns equivalent to savings interest.


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 0.5. This means this stock has low volatility compared to S&P CNX NIFTY index.
  • If I buy this stock, I should expect relatively lower degree of volatility when compared to 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 142
  • Average high yield price calculated based on past 10 years: Rs 146
  • Pricing relative to 9 year average PE ratio: Rs 136
  • Pricing based on PE ratio of 12: Rs 254
  • Graham number: Rs 265

The range of fair value is calculated as Rs 156 to Rs 189.


Qualitative Analysis

  • Visaka generates approximately 81% of its revenue from building construction materials, and 19% from Synthetic yarn.
  • For now, it seems that the company is taking multi-faceted approach to future growth.
  • First, it is using capacity driven growth (scaling up) for its core competency of building materials. It has decent retail and distribution network. This approach assumes the growth of Indian infrastructure needs and growth in rural building construction.
  • Second, it seems to have plans to add power generation and selling by constructing a thermal power plant. I do not anticipate this to be source of growth or independent revenue generation. Over long term, this is likely to offset the power requirements of the company.
  • It has good cash flow and earnings from operations.
  • Debt is an area of concern. It has more debt than its ability to generate cash from its operations. However, its debt as a percentage of profits or percentage of sales has improved over last few years. Nonetheless, I still consider this as a risk which needs to be monitored. This increases sensitivity to economic downturns.
  • Year 2008/2009 shows significant drop in profits even though revenue did not drop. This drop in profits eems to have been driven by significant drop in operating margin, gross margin, increased interest charges, and share dilution. This is typical characteristics of commodity business driven by capacity and competitive environment.
  • On a competitive landscape, Visaka’s management seems to do a better job in managing business over downturns. While Hyderabad Industries and Everest seem to struggle during downturns (on relative terms). I did not consider Ramco Industries due to high debt relative to others.


Summary

I like Visaka Industries because of its ability to manage downturns, generating positive cash flow from operations, and increased dividends.

However, Visaka does not have robust background, that I look for, in a typical long term buy and hold company. It misses on few points like consistency, debt, commodity products, and highly competitive business. Buying Visaka would mean adding risk to portfolio. Buying shares at low end or below fair price range would lower the risk (but will not eliminate it).


Disclosures: Long on Visaka Industries. Please read TIPBlog disclaimer.










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33 Responses to “Visaka Industries – Fairly Priced for Long Term Prospects”

  1. chetan s. raut says:

    These days u taking more time to post new things on blog….might be busy………..or doing lots of research
    u said about visaka industries

    Buying shares at low end or below fair price range would lower the risk (but will not eliminate it).

    then why should invest in company in which u r not sure abt performance?

    Thanx
    Chetan Sadanand Raut

    • TIP Guy says:

      Hi Chetan,

      Do you equate company performance = your risk? And…
      Is there a single company whose performance can be measure in “digital” i.e. zero’s and one’s, or crip black and white ?

      Trying to encourage your curiosity!

      Best Wishes,

  2. vikrant says:

    That was very fast, i actually asked you about this post on facebook last night 🙂

    • TIP Guy says:

      Hi Vikrant,

      That’s called customer/reader service 😉 😉
      I already had written it up at work during lunch time. Somebody called me, and then I forgot !

      Best Wishes,

      • vikrant says:

        Like always, You rock, thanks for valuing your readers questions.

        One more here, The stock has plunged a little in past few days, and on top of it, there is a interim dividend declared by company on 27oct that would be paid on 11 nov, i wanted to buy some, so just checking with you.

        By the way, i loved the way you have responded to all the queries in this post, Some of the answers you gave was hmmmmmmm :).

        • vikrant says:

          one more small questions, if i buy before nov 11 will i be eligible for the dividend?

          • TIP Guy says:

            Hi Vikrant,

            I could not figure out what is the ex-dividend date. Note that “dividend paid date” is not equal to “ex-dividend date”. Anybody holding shares on this date will be paid dividends. You have to be shareholder of record on this date; lot of short term stuff does not always translate into shareholders of record. Why wait until Nov 11? if you like it for buy and hold, jump in now, few Rs. here and there is not going to of much difference.

            Best Wishes,

        • TIP Guy says:

          I rock! wow. So I am rock star? 🙂 Sometimes I have respond that way!

  3. building products (asbestos, my god!), textile, and now power? for a 250 cr market cap company, seem to be of diffused focus – that i would think is a major risk – or may be, i have no idea what i am talking about?

    what do you say?

    • TIP Guy says:

      Hello Student,

      I know where you coming from by saying “asbestos, my god!”. But let’s not go there. I did not expect this expression from somebody who likes to reason 😉 Historically, more people are affected by hunger, public riots, decisive politics, alcohol, smoking, and road accidents – and yet …….

      Best Wishes,

      • i invoke God – though I do not believe that she exists – only out of a sudden shock. I was in the US when the whole thing unfolded some 25 years ago. But leaving asbestos aside, ( just like leaving cigarettes aside when I invest in ITC ), I think it is a case of a company with a diffused focus. I think you have mentioned that too. With all facts available, it then will boil down to individual level of comfort, criteria etc. whether that person will invest or not.

        As usual, you analysis is indepth and honest. thanks ….

    • TIP Guy says:

      Hello Student,

      Reading Visaka vs. long term. Is this an example of trading attention span ;-). Hope you read the summary section!

      Best Wishes,

  4. building poducts (asbestos, my god!), teaxtile, and now power geberation – seems to me a csae of diffused focus for a 250 cd Mcap company. is that not a risk for long term buy/hold? i mean LT is one thing, and Visaka is another!

    • TIP Guy says:

      Hello Student,

      Regarding Visaka vs. long term. Is this an example of attention span of a trader ;-). Have to pull you leg when I get an opportunity!

      Hope you read the summary section!

      Best Wishes,

      • ha ha. By the way, I have taken a break from trading ( or day trading to be precise ); hard to do that when you are also teaching twice a weak to some of the best students in the country and investing and listening to your children scream at you!!! But still, I take the time to read your posts, isn’t that something?

  5. Bhushan says:

    Hi Tipguy,
    Visaka produces asbestos sheets which are banned in developed countries for harmful nature of contents. I guess we should also consider this as risk in investment .By the way wanted one more opinion .Which one would You prefer HDFC or HDFC Bank if You had to choose only one ?

    • TIP Guy says:

      Hello Bhushan,

      Thank you for enlightening me on “asbestos being banned in developed countries for harmful……”. I did not know that. And I also did not know India is considered a developed country – meaning it will get banned in India too 😉

      By the way, why do you think I have to choose between HDFC or HDFC Bank only? Why not others?

      Best Wishes,

      • Bhushan says:

        HI Tip Guy
        Thanks for reply. wow we being developed country sounds great, we have only developed netas and chamchas 🙂 .. i wanted your opnion between HDFC and HDFC bank only since i am holding both and want to know whether to give way for one of them or continue to holding both.and we do share some stocks in common .

    • Aby says:

      I guess Asbetos are not banned anywhere.. There are few regulation which restricts the use of asbetos. Following is an excerpts from Wikipedia “”In 1989 the United States Environmental Protection Agency (EPA) issued the Asbestos Ban and Phase Out Rule which was subsequently overturned in the case of Corrosion Proof Fittings v. EPA, 947 F.2d 1201 (5th Cir. 1991). “. From what I understand, they still use asbetos. Annual report of Visaka Industries 2008-09,Page 23 – 28 also discuss about these issues in detail. I do agree that there is minor risk due to restriction that may come into picture which will finally led to reduced sales. But I dont think it is anything major

      • TIP Guy says:

        Hello Aby,

        You got it! to a certain point. Asbestos is banned in certain developed countries (but not USA). In USA, it seems there are restriction on certain specific type of asbestos. Asbestos is a generic term (like iron). The places where it is banned have alternatives which are economically viable.

        Certainly, it does appear that asbestos is harmful with sustained exposure over time. However, there are ways to control it and population at risk is low (than what media makes it out). At least in India, there is no economically viable alternative. I do not foresee asbestos ban in India for next 5 year or so. Restriction to smoking has been “in process” since time immemorial, but still companies in this business keep making enormous dough…..

        Best Wishes,

  6. Raja says:

    Hi TIP Guy,

    I have a request. It’s regarding the nature of topics which I would love to read (more), here on your blog. It’s mainly regarding the various corporate actions which we hear so much these days but, there is hardly any dissection of those topics from an investors point of view. Few topics which are on top of my mind are:

    1. Issue of preferential shares/warrants at discounted prices to promoters. Like say in ADF foods – on what basis did the promoters issue those warrants to themselves at such lower price than the market value ? Are there no laws on that ?

    2. Significance of rights issue. If you are following the EIH-Reliance deal, and the announcement of rights issue from EIH and all the speculation following that, you would probably understand the reason for my curiosity.

    3. So many QIP placements happening these days. How to interpret it from an investors point of view ? Like say the QIP from Tata motors and the gimmickry of raising the limit just because their is market appetite for it .

    4. Companies raising money via bond issues especially when it’s being done by companies like SBI. After all they are in the business of raising money from people in form of deposits and lending it, then why this bond issue ?

    In fact there are so many other such questions which pop up while reading the newspaper. Thought you might be of help in solving these puzzles for novices like me.

    Your posts on the bonus issue and use of share premium account is the kind.

    Regards
    Raja

    • TIP Guy says:

      Hello Raja,

      It is on purpose that I have tried to stay away from commenting on general business or company events. There are just too many and time spent is not justifiable. In past, I have touched upon these subjects only if they are associated with stocks in my portfolio. That is the reason I talked about ‘bonus issues’ and ‘share premium account’.

      I acknowledge your request. And I think it will add value for readers of this blog if I cover these “generic” industry events – a.k.a comments on news events. I will try to atleast answer some of these specific questions you asked in some type of posts.

      Thanks for your suggestions.

      Best Wishes,

      • Raja says:

        I agree there are just too many events and time spent may not be justifiable. However if at least one of each kind is covered then it becomes easier to relate to similar kind of events in future 🙂

        Regards
        Raja

  7. Vikas says:

    Hi,

    How could I track high dividend yield shares? Is there any custom search available on any website so as to track them?

  8. ramesh says:

    Any views on “Everest Industries”

    There are lots of negative regarding asbestos cement and that could impact visaka,hydrabad(agreed that they are already beaten down but that doesn’t mean cheap can not become cheaper)

    On the other hand although everest derives 65% revenue from roofing, they are betting big on “PEB steel” and hence any future negative news regarding asbestos cement will not impact them.
    Simply look at their “capital work in progress”

    Its just my view and I could be damned WRONG. So need your views on everest especially on their PEB(Preengineered building) part

    • TIP Guy says:

      Hello Ramesh,

      Thanks for your comment about negatives on asbestos. Haven’t read much about Everest or PEB, so cannot comment on it.

      Good to know you like Everest and PEB. So did you take a stake in it?

      Best Wishes,

  9. Young@Market says:

    Hello TIP,

    Thanks for sharing the analysis. I am bit skeptical to deploy funds as I am thinking market is not cheap now a days as you had mentioned in one comment… May be the Coal IPO will suck the money out of Market similar to Reliance power and we’ll see a correction. BTW did you happen to check the coal IPO? I feel Coal IPO is good one… but will have to see how they price it!!!! I am also waiting for your post on SJVN.

  10. Murugan says:

    This stock was recommended by Ramesh Damani and Rakesh Jhunjhunwala also has bought this stock some time back. Any comments on that?

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