Three Potential Companies for Long Term Buy

I am still here. I have not left my blog (yet!). Readers have not bugged me enough that I need to run! I can give few excuses for not writing, but the fact is almost one month has passed without a post. Excuses cannot correct that. So let us say, I became lazy for a while.

During this period of laziness, I kept getting questions about my opinion on various companies. I continued my reading browsing, and among the long list, I came across three companies that caught my attention. Following are my thoughts. Before you go through them, please understand that these observations are for my objective (which does not include pump and dump).

AllCargo Global Logistics Limited (ALLCARGO): It is a logistics service provider dealing with multi-modal transport operations, which include less than container load and full container load cargos for exporters and importers. It owns container freight stations near major ports in India. It also has presence in Europe and is expanding in to airfreight business.

  • Operating Cash flow (overall increasing trend, but not consistent)
  • Debt (higher than cash flow and net profits)
  • Dividends (yes)
  • Reported Net Profit (positive, overall increasing trend)
  • Margins (positive, stable to improving trends)
  • Capital usage (stable in mid-teens)
  • This seems to be a good company with much focused business staying with freight transportation. The company has high debt. However, the fact that owners have very high stake (79%), means owners have high confidence that it is manageable.
  • I have a kind of mixed observation, not great but not bad enough to ignore. I will read more and see if it has merit for my long term portfolio goals.

Aditya Birla Chemicals (India) Limited (ABCIL): It is provider of chemical products like caustic soda, chlorine and its derivatives, and compressed hydrogen gas. Aditya Birla Group has a majority stake in this venture. Being purely in commodity business, its business model is to make money by operational excellence and economy of scale. If an investor wants to buy shares in this company, it should be driven by quality of management. There is nothing unique about its business model, products, and/or market share. It will always be beaten down in competition.

  • Operating Cash flow (overall increasing trend, always more than net profits)
  • Debt (higher than cash flow, but continuously reducing)
  • Dividends (yes)
  • Reported Net Profit (positive, overall increasing trend)
  • Margins (positive, and surprisingly high for commodity business)
  • Capital usage (stable around 20s)
  • Being in a commodity business, I was surprised to see high cash flow, good margins, and return of capital employed. The company also seems to have continued to improve by debt reduction, and operation excellence.
  • I like the company solely due to the quality of management and its ability to execute in highly competitive business segment. I initiated a starter position in this company so that I can follow it much better. Shortly, I will provide my analysis.
  • [April 16, 2007] Detailed analysis on ABCIL

Zydus Wellness Limited (ZYDUSWELL): This Company is subsidiary of Cadilla Healthcare. The consumer business of Cadilla was divested and integrated into Carnation Nutra Analogue. This merged business was renamed as Zydus Wellness Limited. It provides health care conscious food products and skin care products. The food products include low cholesterol butter, margarine spreads, and sugar free. The skin care products include face wash and scrubs. To me, this is another commodity business directly facing the consumer; something like an FMCG business. Branding, operational excellence and economies of scale play significant role in company’s profitability.

  • Operating Cash flow (overall increasing, but not consistent, most of the time higher than profits)
  • Debt (no debt, I like such companies)
  • Dividends (yes)
  • Reported Net Profit (positive, and overall increasing trends)
  • Margins (positive, overall improving trends)
  • Capital usage (positive, and decent)
  • I like this company because of its debt free balance sheet, cash flow, and branding in the market. To me, it appears that management is doing good job of maintaining decent margins and use of capital.
  • One aspect that makes me take a pause is future growth plans. Does it plan to go health conscious driven consumer products in food segment OR does it plan to become run-of-the-mill personal care Products Company? Need to read more.

All three companies seem to have good potential for my long term portfolio. But these are just based on preliminary overview type of reading. Who knows, when we dig deeper something else may pop up. Readers may be little curious that all three of these companies are not a typical dividend type company that I look for. Based on what I have read so far, I put these in a group of well run companies with good managements.

What are you thoughts? Do you agree? What are your observations?

Facebook User Comments:

18 Responses to “Three Potential Companies for Long Term Buy”

  1. Manshu says:

    Glad to see you back. I haven’t dine any research on these companies but based purely on what I read here – none of these look interesting enough to merit a second look.

    • TIP Guy says:

      Hello Manshu,

      Any reason why it does not look interesting? Well, their businesses does not seem to have any panacea attached to it. It is dull boring commodity business. What else?

      Best Wishes,

  2. vikrant says:

    Hi Tipguy,

    We all were waiting for your next blog, so really happy about it, and thank you for writing. By the way , being lazy at times in good. Hope you enjoyed your lazy days. readers who bugged you need to know that everyone needs a break and they are getting all this free of cost so have patience.

    Looking fwd for the analysis.

    • TIP Guy says:

      Hello Vikrant,

      I enjoy reader questions, because they give me lots of interesting ideas. e.g. year back, I had to look hard for companies, but now, I keep getting questions, and I get free list of companies. The list is now at 60+. Another one, I don’t have to worry about topics to write. Questions themselves generate topic for me, my topic list is now at 25+. So it actually makes my life easy.

      Best Wishes,

  3. chetan says:

    Hi Tipguy,
    i asked u about hindustan zinc, have u ever done any analysis on hindustan zinc,or u dont follow PSU company?

    • TIP Guy says:

      Hello Chetan,

      yes, looked into in recent past, and was not impressed. I have summarized it based on my screen in next post. Stay tuned.

      Best Wishes,

  4. Young@Market says:

    Parekh Aluminex –> recently i came across this company, it is listed in the FORBES best 200 under a billion companies. Looks promising, but with only around 30 – 33% promoter holding. Low debt. Please let me know your view if you ever takes a glance.

  5. DS says:

    Only Zydus seems to be a good bet, but it is too expensive. AllCargo and ABCIL probably not.

  6. Have you thought about a rating system? I like what you have done in terms of breaking these companies down into the basics, including the latest trends. I am currently working on my own rating system.

    • TIP Guy says:

      Hello, Double,

      I have intentionally tried to avoid it. The reason being, for me, investing is a subjective process. Numbers are just numbers. The key is to interpret them in proper context. Rating them on some common platform does not allow this subjective interpretation. One can argue, that’s where numbers should help by identifying differentiations. But I find it difficult and always end up looking at subjectively. So I leave ratings for the Rating Agencies :-).

      Looking forward to your rating system.

      Best Wishes,

  7. Ravindra says:

    what is your view about power finance corporation, Unichem Lab & MaxIndia? I am planning to invest in these three stocks..

  8. Ravindra says:

    for power finance corporation…

    I am following outlook money also.. here is the report …

    We had recommended Power Finance Corporation (PFC)—a non-banking financial company focused solely on the funding needs of the power and related sectors—almost a year back, when it was at a level of Rs 200. Considering that PFC’s business has run in a stable manner in a difficult economic environment and it has future earnings visibility, at a price of Rs 276 today, the stock has gained 38 per cent in a year. We are re-recommending it as a long-term buy.
    Business performance. PFC is a Navratna public sector unit that finances power generation, transmission and distribution projects. It is also the nodal agency, selected by the government of India, to facilitate development of power projects with capacity of over 4,000 megawatts, also called ultra mega power projects or UMPP. Although PFC’s consulting business contributes little to its total income, it does give a diverse mix to the company’s product portfolio.

    PFC’s business has grown at a healthy pace over time. The compounded annual growth rate (CAGR) of loan assets in last five years is 22 per cent. In FY10, PFC’s loan book expanded by 24 per cent, which is higher than overall growth in bank credit. The commendable part is that despite high loan growth, the asset quality is impeccable. The net non-performing asset is just Rs 6 crore, or 0.01 per cent of loan assets.

    PFC faces competition in the lending business from banks, but the nature of its capital gives it advantage over them. First, banks face asset-liability management challenge in financing long-term power projects, as it uses short-term deposits to give long-term loans. On the other hand, PFC has the advantage of raising funds by issuing long-term bonds to fund long-term assets. Second, there is a cap on lending by banks to any sector, whereas there is no such restriction for PFC, giving it a free hand to meet large funding demand from the power sector.

    Financial performance. Its five-year (FY05-FY10) CAGR of total income is 19 per cent. In FY10, company’s total income grew by over 22 per cent, while profit grew by 19.5 per cent. The net interest margin has moved to 4 per cent. Several factors help PFC maintain its margin. It raises a major portion of its debt at a fixed cost and has the flexibility to price its loans. Therefore, it is not impacted much by interest rate fluctuations. PFC’s credit rating, equivalent to sovereign debt rating, also helps it raise fund at low costs. Unlike many other PSUs, the company maintains a lean cost structure, which boosts its margin.

    Investment rationale. India, being a power-deficient nation, will need huge investment in this sector. The government too realises this, and work on several ultra mega power projects (UMPPs) has already started. Even if capital becomes easily available, not all the investment in the power sector will be funded through equity. This is evidenced in the current debt-equity ratio of around 3:1 for an average power project. So, clearly, the demand for debt will exist and PFC is well positioned to take advantage of this opportunity. It also has an edge over banks.

    Besides financing power projects directly, it has also started financing power companies’ purchase of raw materials. Another initiative is to finance power sector equipment manufacturers. Combined, these give visibility to PFC’s future earnings. Its track record in maintaining quality assets is another plus.

    Considering these, PFC’s stock at Rs 276, or 13.45 times FY10 earnings per share, is attractively priced and will be a long-term bet for you in the sector.

  9. Ravindra says:

    for unichem…

    The risk of investing in a mid-cap stock currently is that you may end up buying it expensive even if the company’s growth prospects are high. Unichem Laboratories, a 66-year-old pharma company, is in a different group. Its growth is visible, yet its stock is available cheap (if you look at it separately or compare it with other companies in the BSE Healthcare Index). Unichem mainly manufactures formulations (the final product that is consumed by patients), and a small part of its revenue comes from active pharmaceutical ingredients (API; used in manufacturing final drugs).
    Business performance. Unichem is mainly active in domestic formulations and the API market, which account for over 80 per cent of its total income. In the December 2009-end quarter (Q3FY10), its domestic income grew a healthy 18.51 per cent year-on-year (y-o-y). Both formulations and API businesses contributed—formulations grew 18.6 per cent and API grew 26.3 per cent.

    In the domestic market, Unichem has a large portfolio of brands and is present in around one-tenth of the 1,495 therapeutic sub-groups tracked by the pharmaceutical market research company ORG-IMS. It is the leader in 17 therapeutic groups and among the top five in 69 therapeutic sub-groups. Its brands Vizylac and Ampoxin have a market share of as high as 33.2 per cent and 43.7 per cent, respectively.

    One of company’s main strengths is its high-quality manufacturing infrastructure. While other Indian pharma companies are facing regulatory hurdles in penetrating the US market, Unichem is well set to grow fast there. Most of its manufacturing units are approved by the Food and Drug Administration (FDA), US, and it should not face regulatory hurdles in selling drugs manufactured at its India-based facility. The company has a strong pipeline of ANDAs (abbreviated new drug applications; required for selling generic drugs in the US) and has also got a few approvals. These indicate that the company’s international business is set to grow fast on the current low base.

    Financial performance. Unichem has performed consistently over the years. Sales and net profit have grown at a compounded rate of 13.52 per cent and 28.60 per cent, respectively, in the last 10 years. Higher growth in profit than sales is a result of continuous improvement in its operational efficiency. The return on capital employed (RoCE) has risen from 15.77 per cent in March 2000 to 30.10 per cent at the end of previous quarter. The balance sheet is clean with a very low level of debt. Even then, the company has generated a high return on shareholders’ capital, with a return on equity of 22.40 per cent at the end of the previous quarter.

    Investment rationale. Until recently, Unichem has been focussing on its domestic business, where it should continue to grow at a healthy pace given its strong brands, wide distribution and rapport with doctors. The next leg of growth will be from its international operations, which have a small base currently. Unichem already has regulatory approvals in the US for some of its brands. There are more in the pipeline. In the UK, it already has a presence through its 100-per cent subsidiary Niche Generics. The company assists in the sale and distribution of generic products in UK market, and it is expected to break even soon. This will boost Unichem’s bottom line in the future.

    Given the visibility on Unichem’s growth, its stock is attractively priced even though its value has doubled in the last one year. At Rs 437, it is trading 12 times its annualised earnings per share for FY2010 as compared with the industry’s PE of 26.64.

  10. Ravindra says:

    MaxIndia I feel.. it is available cheap because of ULIP issue between IRDA & SEBI..I feel company is good & future for health insurance business apart from other insurance business is very good in India because current penetration is merely 2 to 3%

  11. Ravindra says:

    tame javab nathi apyo haju.
    Do you think these stocks are good to invest? Which one you prefer out of these three stocks?

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