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.
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.
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.
- 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.
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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