Starter positions

29Jul10

I have created starter positions in the following 3 companies. A minor analysis.

Cera Sanitaryware: Many stock publications club the sanitaryware segment into the “Ceramics” space however these two categories have different economics and are not comparable. Some different segments related to the “Ceramics” segment are:

Sanitaryware : CERA, HSIL, Parryware

Bath fittings: CERA, HSIL, Jaquar

Ceramic Tiles/Vitrified tiles: Kajaria, Somany, NITCO, Asian Tiles

Wellness segment: Steam cubicles, Massage bath tubs, Equipped panels, etc.: CERA, Kajaria

There are multiple listed ceramics companies but only 2 sanitaryware companies. Though there may be considerable overlap (like Hindware/HSIL is active in both bath fittings and sanitaryware) between these various segments. But not much of an overlap between sanitaryware/bath fittings and ceramics players.

If one sees the performance of the 2 segments separately, one can see that the ceramics as a segment has very bad economics and this trend can be seen across years.

But Cera and HSIL seem to have better economics and though hindware has a better brand name, cera seems undervalued in traditional measures. I believe there are multiple sanitaryware players in the market but most seem to be concentrating on the premium segment. Cera has maintained a clear value proposition of “value for money” and at the same time launched premium products under a different brand game. They have increased their revenues 3.5 times and profits 8 times in the last 5 years. Cera has maintained a RONW of 20-25% and a D/E ratio of 0.6 to 0.8. Though they do not need debt, they seem to be comfortable with debt on their balance sheet and this increases the RONW. It is available at a P/E ratio of 7.5 now.

Peninsula Land: Real estate stocks are out of favour now and I find a few names appearing in my screens. Ashiana Housing and Marathon next gen realty are the other two names which appear on my screen. I was not comfortable with the cash flow characteristics of the other two. Peninsula, though having negative CFO for last 2 years, had +ve CFO for considerable period before that. They operate across commercial, residential and retail space. They target premium consumers and have increased revenues from 250 crores to 750 crores in the last 5 years.  Their average profits for last 5 years is 180 crores. Their profit margins have oscillated between 25 to 40%. I am not entirely comfortable with the company and plan to do more analysis. However it is valued at 1900 crores, has 650 crores cash and 450 crores debt, effectively giving an enterprise value of 1700 crores. Its normalized P/E is around 10 though actual P/E is 6.xx. However, P/E ratios should not be used much while valuing real estate companies since their land banks are a more important measure of their value rather than the earnings.

Omnitech Infosolutions: This company operates in the remote infra management space which has other players like allied digital solutions and glodyne technoserve. They basically provide offsite infra support for firms which have computers. These companies also act as disaster recovery centres. Hence established brand names charge a premium. Disaster recovery is an important component of risk minimization of companies and hence companies would prefer to pay a premium to a more reliable service provider. Allied has grown its revenues from 45 crores to 350 crore+ in last 5 years whereas Omnitech has grown its revenues from 45 crores to 200 crores in last 5 years. Their profit margins have been between 15 to 20%. RONW has been between 20 and 40% and D/E ratios are less than 0.5. Omnitech has increased profits 5 times in 4 years and Allied 7 times in 4 years. These obviously are due to low base effect. However the interesting aspect is the equity dilution these companies have done. Corresponding EPS growth has been 2.5 times and 1.7 times, a far cry from the PAT growth. However the company which is profitably growing at 30%+ with healthy profit margins and ROE’s is available at a P/E of 6.xx.

These companies look “cheap” from traditional metrics however the tougher job is to find why they are cheap!! Has the market ignored them or is it a case of  “do not touch”, only more research can tell.

I have created starter positions in these companies. Would hopefully provide a detailed study on these sometime. Any opinions on these 3 companies?

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4 Responses to “Starter positions”

  1. I am quite Hung-go about the remote infra management space & allied digital has justified that in my portfolio. There is this Co called Microland promoted by Pradeep Kar that had made initial forays in this space, wonder how is it doing

  2. Hi Pradeep,
    Nice picks. I like Cera the most among the 3. The only concern for me is the low dividend payout. Regarding Peninsula i don’t have much clue as i stay away from Real estate companies as i don’t understand them(high FII ownership could be a concern). Regarding Ominitech again i am not too sure. There are a decent number of small & midcap IT companies that are cheap but again i find it hard to understand their business and whether or not they r cooking the books. Again the low dividend yield and payout are a concern for me.

  3. Vasant,

    I do not understand this space much actually. It is kind of important in this space to predict the future since most of the cash is being invested for the future and hence it is future cash which will make this investment a success. I however did read many reports that RIMS is going to be a good space in the future. Will study more. Thanks!

    Sid,

    I agree completely with you. Even I am most comfortable with Cera. Their product is simplest to understand and everyone would have used it at some point ;). Peninsula book is very complicated with too many subsidiaries. Peninsula is a bet that real estate is now out of favour and hence valuations depressed and trying to pick which company seems to be in good shape. It is from the Piramal group but It is not a long term pick. Just hoping its valuations catch up in a year or two. Omnitech, is a bet on the space. There does seem to be interesting opportunity in the RIMS space. Will study it further.

  4. Hey Pradeep,

    I was looking up on Peninsula Land and came across this Ninad Kunder’s post (slightly dated), but will give you an idea on promoters.

    http://investingvalues.blogspot.com/2008/07/peninsula-land.html

    I for one can’t evaluate real estate companies, but thought would let you know this piece of info. Hope that helps.

    The only real estate company that interested me was NESCO and especially because they have a conference hall which is booked almost 365 days a year, generating a ton of income. Again, haven’t evaluated it in detail, but if you do get to analyse it, do let me know of any insights.


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