Hindustan Tin Works.............Can it execute properly

I had talked about Hind Tin Works few weeks ago on my blog as an arbitrage play. The value of its stock (approx 44/-) was lower than the book value per share (57/-). After that post the stock has already appreciated more than 10% and is currently trading at 48.75/-. I also did some further research to understand the company's business and have documented the same in the blog below for everybody to review.

The company is in the business of metal cans based packaging for all kinds of FMCG products. Recently they have also added 2 piece beverage can to its product portfolio after tying up with Rexam Plc of UK. Rexam is among the top producers of 2 piece beverage cans globally. The regular tin based metal container business of Hind Tin is nothing to talk about. It is pretty generic and I believe the company does not have any moat in that business.However, the 2 piece beverage can business gives Hind Tin some temporary moat as it is the only manufacturer in India. The nearest competitor is still 12 months away from starting domestic manufacturing. Further details about the company's products, their manufacturing infrastructure, basic financials and recognitions received can be obtained from the website directly.

http://www.hindustantin.biz/about_us.asp

The growth in modern retail and changing consumer demographics in India will further drive the demand for attractive packaging of FMCG products in India. Packaging is the biggest cost component for any FMCG company and increase in consumption will directly increase the overall market for packaging solutions in India. Hind Tin with it's integrated facilities from metal can manufacturing to printing and labeling is in a good position to capitalize on this increasing demand for packaging solutions. The addition of 2 piece beverage can to its product portfolio will be the biggest revenue and margin driver for Hind Tin Works Ltd in future.

Valuation:

The company has grown it's topline at a CAGR of 10.52% and bottomline at approx CAGR of 40% from FY 03 to FY 07. Correspondingly the net margins have been improving steadily from 1.33% t0 3.4%. With the introduction of 2 piece beverage can these figures should improve in FY09. The company already paid 15% dividend on a face value of 10 in FY07. With current share price of 48.75/- the dividend yield comes close to 3%.

The company is trading at a P/E ratio of 8.15 and 14.5% discount to its book value based on FY07 financials. This is cheap when compared to its peers in Indian markets. It is very difficult for me to estimate the future earnings potential of Hind Tin Works since I am not clear how successfully they will be able to execute their future growth plans. However a profitable manufacturer with a niche product can be valued at 1.5 times its book value. That means the value of Hind Tin works should be close to 57 x 1.5 = 85.5/.

Risks:

The biggest risk with Hind Tin Works Ltd lies in the management's ability to execute their plans for future growth. The current market for beverage cans is estimated at 20 crore cans per annum while Hind Tin has a capacity to make 45 crore cans annually. Besides new players will come in market next year which will add another 60 crore cans to the domestic capacity. Oversupply could be an issue if the offtake of cans is not as fast as Hind Tin has anticipated. They also carry significant commodity risks. I am not sure whether Hind Tin is adequately hedging it's commodity risks. I believe there is limited long term moat in Hind Tin's business. It is a pure volume play and margins are pretty low. Any severe downturn in Indian markets will be a true test for their business model. Their 2 piece beverage can project is pretty new. Specific details are not available in public domain to assess the earnings potential of that business. If you come across any specific details in public domain please forward that to me and I will be more than happy to analyze the impact on Hind Tin's business.

In spite of all these risks I found Hind Tin Works current position in Indian markets and share price very attractive and hence added it to my personal portfolio. As I have always said with my previous post; please do your own homework and only buy Hind Tin if you are convinced. If it is not suitable for you please avoid it as there are more than 5000 companies listed on India bourses to choose from. If you have any questions or comments feel free to contact me at secmoney@gmail.com

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks.

Disclosure: I have this stock in my personal portfolio at the time of writing this blog

IS GMR Infra Overvalued ?

Dear Readers,
Is there anybody who feels that GMR Infra is overvalued relative to its current and future earnings. I am not able to decide because GMR Infra does not have long enough history to evaluate its past performance. I want to throw this question in public to see what some of the readers of this blog think.

I know it has lot of projects under construction and will be bidding for more projects in future but the fact is that it will also be draining lot of cash in servicing debts that have been raised to finance these projects. Infrastructure is the momentum sector now but then Information Technology (IT) was the hot sector in 2000 and look what has happened to all the IT bellweathers even though they are still growing at 15 - 20% annually. In the long run I believe stock price always reflects the true value of the business and GMR Infra's stock price may be currently way above the intrinsic value of it's business.

Does anybody shares this thought?

Regards,
Bargain Hunter

DISCLAIMER: I do not have any long or short positions in GMR Infrastructure

SEBI finally permitts Short Selling for everybody.............

In a landmark day for Indian markets; SEBI (Stock Exchange Board of India) once again permitted short selling on stocks in Indian markets by all participants including FII and DII after banning the practise in 2001 following the KP meltdown. The detailed piece of news can be read from Business Standard's website below:

http://www.business-standard.com/common/storypage_c_online.php?leftnm=10&bKeyFlag=IN&autono=31557

I am not going to repeat the press release her but one important point I would like to mention is that this is a very positive news for Indian markets. This will now create what we call as "Sell side" in Indian stock markets. It will create a true counter balance for all the bulls in India. Till now the bears were handicapped as they could only play in the F&O segment. But after an appropriate Stock Lending and Borrowing (SLB) mechanism is put in place the playing field would be even for both bulls and bears. That will help us in true price discovery for each stock. To start with.......short selling will only be allowed in F&O stocks but I believe at a later date it could be allowed in all the stocks listed on the bourses like any other advanced market in the world. Also this could potentially give rise to new financial products like a long - short funds, pure short funds, etc. Considering the bull run in India for last 4 years and the potential of a slowdown over the next 2 years I believe there will be lot of potential opportunities to short overvalued stocks.

If anybody shares my toughts, disagrees with it or have any questions feel free to contact me at secmoney@gmail.com

Regards,
Bargain Hunter

ANG Auto Ltd...........Trading below its buyback price of 215/-

During these high interest regimes most of the interest rate sensitive stocks have taken a beating. Some of the biggest losers have been in the auto ancillary sectors where stock prices have been cut in half. Few months ago I wrote about Sundram Fasteners in my blog as an attractive candidate for long term holding. After writing about it on my blog the stock has appreciated more than 10% and was trading around 56/- yesterday with good volumes.

Introduction:

Another good company in the auto ancillary sector is ANG Auto Ltd (previously called as ANG Exports Ltd) It is a Delhi based company involved in manufacturing of various components and sub assemblies for braking, suspension and transmission systems for commercial vehicles. It also has a unit in Sitarganj which manufactures Trailers that can be attached behind a tractor trailer to haul 24 and 30T loads. Detail information about the company can be obtained from its website

http://www.anggroup.biz/

Positive Factors:

Currently most commercial vehicles in India are fitted with manual slack adjusters. One of its key product called automatic slack adjuster has also got an Indian patent on it. Currently most commercial vehicles in India are fitted with manual slack adjusters. Very soon due to changing laws and advanced automotive designs these manual slack adjusters will be replaced by the automatic versions. This will positively benefit ANG Auto due to its existing relationships with manufacturers like Ashok Leyland.

The biggest revenue and margin driver for the company going forward will be the trailer segment. The company has a current capacity to manufacture 500 trailers a month and claims to be the only organized player in India. Rough estimates put trailer demand in India upwards of 1,000 units a month which means the company currently has a capacity to satisfy 50% market demand in India. Improving road infrastructure and supreme court's ban on overloading is bound to increase the sales of trailers because the cost / kg / km for trailer is approximately 30 - 40% lower than in typical trucks. Also increased containerization of domestic cargo will further strengthen the demand for trailers.

Even in the current slowdown in auto ancillary industry the company is able to maintain its operating and net margins in double digits and better than most of its competitors.

Negative Factors:

1) ANG Auto derives significant amount of its revenue from export market which makes it susceptible to currency fluctuations
2) Domestic demand is highly sensitive to interest rate and strength of the overall economy
3) Material cost Inflation is always a risk for commodity intensive business like ANG Auto.
4) Sales to Ashok Leyland did not materialize as projected while constructing the Sitarganj unit

Near Term Catalyst for Stock:

The company announced that it would buy back shares upto 25% of its capital below 215/- about a month ago. What does that tells you is that the company thinks it shares are highly undervalued and is willing to commit its own money to provide better returns to its shareholders. I think the shares should be trading around atleast 215/- levels...........if not more. As per data from corpfiling (http://www.corpfiling.co.in/home/homePage.aspx) insiders also have been buying decent amount of stocks since the buyback was announced.

Valuation:

The stock trades at a P/E ratio of 9.08 and a P/B ratio of 2.7/- with FY2007 eps of 17.51 as per (http://www.moneycontrol.com/). The auto ancillary sector is expected to grow at a CAGR of 15% till 2015 as per ACMA (Automotive Component Manufacturers Association). If we assume that to be true and also assume that the company will atleast grow at the rate of overall sector growth then the stock should atleast attract a P/E multiple of 15 from the market. This will give us a value = 15 x 17.51 = Rs.262/- Of course we are making an additional assumption that there will be no further dillution in equity. I think due to the buyback arrangement the equity of the company will go down in near term which will make the stock look even cheaper.

I feel there is a decent probability to make money in ANG Auto and hence bought it for my personal portfolio. If you are not convinced about the ANG story give it a pass.......I promise you will get lot of other good companies to invest in India. As always if you have any questions feel free to contact me at secmoney@gmail.com or drop a comment at the blog itself

Regards,
Bargain Hunter

Disclaimer: Investing in stocks is very risky and an individual can loose all the money invested in equity markets. Please consult your financial advisor before investing in any stocks

Disclosure: I have this stock in my personal portfolio at the time of writing this blog

Arbitrage opportunities............

Sometimes the best way to make money with minimal risk is trade on arbitrage opportunities. One such arbitrage play is to buy stocks trading below their book value and then sell them when they reach closer to their book value. The assumption is that over the period of time the market will realize that it is not worth selling any company below the book value and hence will raise the share price to bring it closer to the book value. Of course like any other investment activity we need to have caution with this approach also. However, we need to make sure that there is no potential risk of erosion of book value otherwise the virtual profits that we assumed before buying the stock could vaporize very easily. Some of these stocks that I came across recently in Indian markets are
(Book value and share price for all these companies have been obtained from www.livemint.com on 6/12/2007)

1) Hindustan Tin Works Ltd:-

Current share price = Rs. 44.65/-
Book value per share = Rs. 57.95/-
Discount in share price as compared to book value = 23%

2) Vardhaman Textiles Ltd:-

Current share price = Rs. 151.05/-
Book value per share = Rs. 189.03/-
Discount in share price as compared to book value = 20.10%

While analyzing a company's book value please make sure that you are calculating the tangible book value. Remove all the intangibles and goodwill to get the cash value of a companies asset. Also make sure you understand the company's business and quantify any erosion in book value due to future risks. These things will help you understand whether there is a real arbitrage opportunity or not.

As I have always recommended in my previous post please do your own homework before you make a buy or sell decision on any stock. If you cannot understand a company and it's business it is always better to give it a pass. There are more than 15,000 listed companies to choose between Indian and USA markets.Feel free to drop me any questions or comments on Regards,

Bargain Hunter

FULL DISCLOSURE:- I own shares of Hindustan Tin Works Ltd in my personal portfolio and have recommended Vardhaman Textiles to friends and family.

DISCLAIMER:- Investment in equity and equity related instruments is extremely risky and there is every possibility you will loose all the money that you invest. Please consult your financial advisor before making any investment decisions.