Shortlisting Five Companies for Potential Long Term Investment Analysis
Last week, I discussed my stock screening process and four matrices that I use for short listing the company for further evaluations. One of the traits of any successful investor (or for that matter even a trader) is that they keep a watch list of stocks and monitor its performance. Since the market has run up and we investors believe that stocks are overpriced, it is time to prepare our watch list. In addition, after establishing the watch list, it is also important to determine what would be the price you would be willing to pay to buy it.
Keeping with this thought process; I looked at few stocks and applied my screening process. I have short listed following five companies that I believe warrant further details analysis in the context of my buying objectives.
Voltamp Transformers Ltd: The Company is engaged in manufacturing transformers. The Company has installed facility to manufacture oil filled power and distribution transformers, resin impregnated dry type transformers, and cast resin dry type transformers. It has technology collaboration with German company. It also provides repairs, conversion, capacity enhancement, and overhauling services. The company, formerly known as Voltamp Corporation, was founded in 1963 and is based in Vadodara, India (my hometown!). Is the current dip in revenue a buying opportunity?
- Operating Cash flow (positive and growing trend)
- Debt (practically no debt)
- Dividends (yes)
- Reported Net Profit (positive and growing trends, is it below operating cash flow?)
- Margins (in low 20s)
- Capital Usage (TBD)
- Voltamp Stock Analysis [Added on November 16]
Hyderabad Industries Ltd: It 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). Does this reflect any management capabilities in the context of HIL? HIL products are in the building industry. HIL’s 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 and Plant and machinery for these products.
- Operating Cash flow (growing, but lacks consistency)
- Debt (reducing trend)
- Dividends (yes, only in recent years, quality?)
- Reported Net Profit (positive and growing trends only in last five years or so, is it below operating cash flow?)
- Margins (high single digits to low double digits)
- Capital Usage (TBD)
- Hyderabad Industries Stock Analysis [Added on November 27]
Greaves Cotton Ltd: It was established in 1859, and is one the oldest engineering companies in India. It manufactures a wide range of industrial products to meet the requirement of core sectors in India. The Company’s core competencies are in Diesel/Petrol engines and Gensets that are used in Agro Equipments, Automotive, Auxiliary Power Equipments, Construction Equipments, and selective Industrial Equipments. I admire its ability to survive for such a long time period.
- Operating Cash flow (positive but very cyclic)
- Debt (reducing trend driven by asset sales)
- Dividends (yes, only in last few years, quality?)
- Reported Net Profit (positive but cyclic, is it below operating cash flow?)
- Margins (high single digits, seems to be in reducing trend)
- Capital Usage (TBD)
Blue Star Ltd: It is India’s largest central air conditioning company with an annual turnover of Rs 2574 crores, a network of 29 offices, 5 modern manufacturing facilities, 700 dealers and around 2600 employees. Blue Star primarily focuses on the corporate and commercial markets. These include institutional, industrial and government organizations as well as commercial establishments such as showrooms, restaurants, banks, hospitals, theatres, shopping malls and boutiques. It also has leadership in the field of commercial refrigeration equipment ranging from water coolers to cold storages. I like that fact that the company is generating approximately Rs 1 Crore of revenue per employee.
- Operating Cash flow (positive and growing trend)
- Debt (reducing trend)
- Dividends (yes, quality?)
- Reported Net Profit (positive and growing trends, is it below operating cash flow?)
- Margins (high single digits)
- Capital Usage (TBD)
- Blue Star Stock Analysis [Added December 4]
Crompton Greaves Ltd: It is part of the USD 3 billion, Avantha Group, a conglomerate with global footprint. CG’s India operations were established in 1937, and since then the company has established its leadership position in the management and application of electrical energy. It is engaged in designing, manufacturing and marketing technologically advanced electrical products and services related to power generation, transmission and distribution, besides executing turnkey projects (i.e. concept from concept to commissioning). The company offers wide range of products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps and public switching, transmission and access products.
- Operating Cash flow (positive and growing trend)
- Debt (reducing trend)
- Dividends (yes)
- Reported Net Profit (positive and growing trends)
- Margins (8% to 16% range)
- Capital Usage (TBD)
I expect to complete my analysis during the month of November. I will post my view one company at time. Meanwhile, I would also like to know your thoughts on above companies. So may either leave your message below, or send me an email using the Contact Me form. Let the discussion being!
Furthermore, I noticed Blue Star’s per employee revenue. First, I am not sure if it is a typo or a correct number. If it is in fact a correct number then management gets few brownie points from me. Second, how would this compare with our IT big wigs? Can any reader share this number?
blue star, cotton greaves, crompton greaves, good dividend companies, good dividend stock, hyderabad industries, voltamp transformers
Hi Tipguy (Whatz ur name BTW?),
Ur are doing a wonderful analysis. Keep going. Three of the five stocks you have mentioned are in my radar. (Voltamp,CromptonGreaves,Greaves Cotton). I own Greaves Cotton but bought it before the recession. Though i have lost 40% from the price i purchased, i still own it.I have been watching Voltamp from 750 and crompton greaves from 290. This stock has particularly run up on the back of spectacular results.
Please put ur analysis.
Alchemist,
Any reaason why do you think Voltamp/cromption are good potential for long term holdings? What would be your buy price?
Regareding Greaves Cotton, if you are holding for long term, why are you worried about 40% lost, or is your worry form the fact that its fundamentals does not seem that attractive?
Would like to know your thoughts.
Best Wishes,
Hello TIP Guy,
What do you mean by (?) and TBD ?
HDIL – has a advantage of being in high growth buidling industry. India still needs lots on houses. So i think it is a steal at such a low PE.
Cromption Greaves – I have a concern of these foreign companies. they just buyback shares and take is as fully owned subsidiary. Does this company have this risk?
Looking forward to you analysis.
thanks in advance.
Shakuni,
Question mark means that’s one issue I need to understand, and TBD means “to be determined”
Good to know your thoughts on HDIL. On Cromption Greaves, I can very well understand your concerns.
Thanks for your comments.
Best Wishes,
after reading last post I was going to request to give some example and you gave it in next post.
why is capital usage TBD, does this mean you ignored this criteria? if yes, then why do you include in first place….
Regards,
Shikha,
Grrr, why do you ask tough questions. capital usage is TBD because it needs more time. No i do not ignore this criteria in screening. I am looking for birds eye view during screening. If if not very obvious, I use TBD. If there is gross issues, then I give negative mark.
Best Wishes,
Interesting and informative blog. Came here from BlogCarnival.
Thanks and hoping to see you more often, and also hoping you would add to this discussion here.
I ran some back of the envelope numbers for Infy and I think they must be around 20 lacs per employee.
Here is what I did:
Go to latest qtr results:
http://www.infosys.com/investors/reports-filings/quarterly-results/2009-2010/Q2/IndianGAAP-press-release.pdf
Income is — 5585 crores
Multiply by 4 – 22340 crores annual income
Employee count – 105423
Rev Per Employee Per Year – 0.21 crores.
Good enough for our purpose?
Manshu,
This great, and it helps put this into perspective. I think the next step (which i think I should do in a post) is to compare on the basis of profitability. Lot of blue stars revenue is tied into the materials (perhaps!).
Thanks for digging this info.
Best Wishes,
i would stay out of Hyderabad industris. It has failed in steering ambassador. It had vantage position but let other come and eat its lunch. It has failed to move its business ahead. if the mangaement is same, the best is to stay out of it.
I would like to know your thoughts on this aspect.
Yogi,
Acknowledged your inputs about management. I will keep that in mind.
Best Wishes,
Overall a good list, and following is what I think…..
Voltamp: too much dependent on government projects, less in private sector
Hyd industries: bad management, shows good performance in last few years, because of growth in economy and construction project. It is not due to good managmenet. A rising water raises all ships.
Greaves cotton: I can understand your admiration for long survival, but there is nothing to cheer about in last 20 years or so. Has been doing good for last 4 or 5 years. And that too when it started selling it assets. Anybody and look good by selling own gold.
Blue star: too much focused and not properly diversified. For long term survival and growth one needs to think of companies that are in few different sectors. Otherwise very risky.
Crompton greaves: everything good and probably a good buy for long term. But I would be wary of the fact that majority of holdings is foreign company. They will buyout during the downturn!
thanks.
anonymous ji,
India needs a huge investment in infrastructure. When it comes to power infrastructure (T&D), there is even more demand for spending and my view is that the majority spending has to come from government. Coupled with this, low FII holding, around 52% promoter holding, virtually debt free company increases the chances of making this a great investment. Since it belongs to small cap, the only concern is the risk that is attributed to any small cap stock.
I was talking about Voltamp transformers just incase anybody is confused
Alchemist,
Good points. Yes we all know there is need for power infrastructure. There is no two thoughts on that one.
But the point in any analysis should be “what is in there for me”. Is the expected return over a period of time justified for any individual’s portfolio? Not always, but typically, government enterprises have lower expected return, and companies depending on government projects tend to have varied cash flows. Good aspect about Voltamp is, it is practically debt free. And I love debt free companies.
Best Wishes,
Since we are considering the long term growth aspect of the company…. i will place some facts..
The customer wise revenue split…
Power : 10%
Metals :11%
Cement:9%
Real Estate:9%
SEBs:8%
Infra:7%
Private Utilities:5%
PetroChem:15%
Others:26%
From the above, one can see a very good diversification of business sector wise & they also represent the chief propellents of the economy (which you can expect to grow at 6.5-7% (again conservative)) and one can safely assume a decent growth of the above industries.
The CAGR of the company for the past five years is 46%. Even if one is very conservative, one can safely assume the company to grow at 15-20% in the next few years..
your thoughts are welcome….
Alchemist,
This is very good data point. Yes, I looked at it yesterday, and I must say I was a bit surprised to see the diversification. It does add one more brownie point. The more I am reading about Voltamp, the more I like it.
Comments on CAGR: In my thought process, this metric does not have any applied meaning. It’s just an average number which needs to be put in context of few other things. Such as-
(1) 46% CAGR, w/ std dev. of 25%, which shows high business volatility, which does not necessarily mean it is bad.
(2) 46% CAGR in revenue growth includes 35% average growth in sundry debtors. What this shows is revenue is recorded but company is still not getting paid. CAGR will reduce (IF) any of sundry debtors default. I don’t know if this is bad, but certainly the trend is not good. This needs to be weighed against liabilities.
(3) Such a high growth should be accompanied by similar levels of Cash flows – I am still looking so cannot comment.
Now putting this into perspective of “what’s in there for me”, dividends have not grown, so I should only bank on capital appreciation. So it could be a good company with good future projections, I will need to buy at sufficiently low price for a good expected return.
Reiterating that I am not saying company is bad or has issues. I am attempting weigh in factors from my objectives.
You have great inputs. Appreciate it.
Best Wishes,
Anonymous,
You have raised very valid points. I will take that into considerations. My first take on your comments:
First, I would tend to agree with you on HDIL and Greaves Cotton. But needs to be put into the perspective of expected return and risk. Assuming those are significant concerns, what’s the next step, can you measure them and put some quantitative numbers. OR completely ignore them based on just qualitative judgment?
Second, for other companies, points you mentioned can be viewed as good or bad, depending upon how you want to look at it.
Appreciate your inputs.
Best Wishes,
Hi,
I have holding in following stocks
can u suggest me,if i need to rebalance or add new stocks?also give me your openion on bharati shipyard plz.
company Name Return Till date
1)Tata steel 65%
2)hindalco 51%
3)bank of india 12%
4)dena bank 90%
5)cairn india 12%
6)larsen and tubro 61%
7)satyam computer 200%
8)ntpc 25%
9)power grid 41%
11)nhpc -8%
12)reliance communication -50%
I am very long term investor,i brought all these shares during last year of sensex fall.
please advise me on my portfolio and suggest me some changes if required
Hello Chetan,
Again, my apologies. I cannot help here. I can give you “on the fly” response, but I do not believe in tips. To do proper justice, this type of review takes quite a bit of time.
AND on this blog, I have not thought about giving portfolio advises (yet). But that’s a good idea for a future premium services
.
Best Wishes,
Have you ever looked at “Kemrock Industries”. They are into FRP (Fibre Reinforced Plastics), supplying to Railways,Light Weight AirPlanes and kind of sophisticated parts.
They have got techincal collabration with Georgia International and also they are in technical know-how tie ups with NAL/HAL ( Hindustan Aeronautics Lab).
I have not studied financials in a deeper way, but I have been tracking this stock since last 6 months and seeing great value in it.
Please have me your comments,if any.
Hello Bhavin,
It does not fit into my objectives and fails my screening process.
- Negative operating cash flow
- Very high debt
- Lack of dividend history
Best Wishes,
How do you assess bartronics from Long term investments. The company is not only having monopoly in RFID area(growing with major govt contracts coming). It has subsidiaries and marketing alliances in the US, Middle East, Malaysia, Singapore, Sri Lanka and many other countries. specializes in barcodes, Radio Frequency Identification (RFID), smartcard technologies, and data communication technologies.
* Operating Cash flow (growing, but lacks consistency)
* Debt (increasing trend:()
* Dividends (yes, only in recent year, quality?)
* Reported Net Profit (positive and growing trends)
* Margins (operating Margin in 2 digis and growing )
* Capital Usage (TBD)
Debt/Equity ~ 1.4
revenue, EPS increasing trend
Let me know your views.
Hello Naveen,
Bartronics operating cash flow has been consistently negative for last three years. So no no for me.
Best Wishes,
In the same industry as Voltamp is another company: Transformers and Rectifiers. Tip-guy, what’s your take on this one? It did have a year of -ve cash flow, but overall seems good and has a reasonable dividend history, even if not very high yield at the moment.
On Voltamp, is the ROCE unrealistically high? In your view, when does a compnay go to a ROCE of 65% like Voltamp is today?
In a related industry, did you also look at Numeric Power systems?
Thanks,
Arun
Hello Arun,
Voltamp’s high ROCE is due to focus on business model which is varibility driven. i.e. its operating cost structure depends upon the level of order it receives. Many of standard processes/components are outsourced. For example it has less than 125 full time employee, it outsources its casing and forming, etc., Plus it is debt free. I am not sure about 65%, but average is of the order of 45%.
Transformers and Rectifiers is not my type of company, too many instances of negative operating cash flow.
Numeric Power Systems seems to be good one, but has much more diversified product based and not transformer specific.
Best Wishes,