Wipro Buyback 2019

Wipro has announced a buyback worth Rs 10,500 Crores. The Wipro buyback is for 32,30,76,923 at Rs 325. This represents nearly 5.35% of the company’s equity. In 2016, the company had done a buyback for Rs 2,500 Crores and in 2017 it did a buyback for Rs 11,000 Crores. The buyback type is through the tender route.

Wipro buyback details

Wipro buyback details

Buybacks create an arbitrage opportunity for retail shareholders. SEBI’s guidelines on buybacks through the tender route stipulate a 15% reservation for retail shareholders. Those with less than Rs 2 Lakhs holding on record date are considered retail shareholders. Simple calculations and assumptions can show us the probable returns from this buyback. In 2017, we made ~ 10% over 5 months in the Wipro buyback and later also made a similar return in the HCL Tech buyback in 2018. The acceptance ratio decides the return that shareholders can make from the buyback.

Wipro Buyback

If not the buyback, you could park your funds somewhere else. Liquid funds are the lowest risk asset class available for such a short duration and over 4 months, these funds give close to 2.2%. Considering the moderate risk in this buyback trade, investors might expect around 5% returns over 4 months.

The expected acceptance rate for Wipro is > 90% and thus investors have an opportunity to make ~ 10% to 15% returns (depending on what price they buy the shares). The buyback process takes 4 to 5 months. But, the return and the probability of high acceptance rate makes it a good opportunity with relatively low risk.

How much to invest?

The maximum you can invest to qualify as a retail investor is Rs 2 Lakhs (as per valuation on record date). Investors should try to invest at a price lower than Rs 310 to earn a 5% return. However, the cheaper you can buy it for the better your returns will be. If you are invested in liquid funds or are holding cash in your portfolio, then this buyback offers a great investment opportunity.

 


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Wabco India Delisting Candidate

Wabco India delisting is on cards as ZF Friedrichshafen has acquired the parent company in an all cash deal. Subsequent to this development, as per SEBI regulations on takeovers, ZF Friedrichshafen has made an open offer to the shareholders of Wabco India. The open offer is at Rs 6318 which is nearly 25% lower than it’s 52 week high. While this open offer will not find many takers, ZF Friedrichshafen will eventually look to delist the company.

Priced at $136.5 per share, it is an all cash deal worth $7 Billion. The deal should be closed by 2020. ZF Friedrichshafen is privately held. The company been moving towards developing technologies and components for self driving cars.

Wabco India Delisting

Wabco India has delivered Multibagger returns to it’s shareholders. Over the last decade, it has been a mega wealth creator. Although we do not expect multibagger returns till it’s delisting we will look for a short term opportunity in the stock. We expect the delisting process to start in mid 2020 and complete by 2021. This is a 2 year long window that we are assigning. Morever, there has to be a 12 months gap between the open offer and delisting.

How much returns can investors expect in this delisting process? ZF Friedrichshafen paid ~ 18.5x the EPS of Wabco USA. As on date, Wabco India trades at a PE of 39x. The current valuations are already at a premium and ZF Friedrichshafen would not want to pay a higher premium. In terms of price, $136.5 was a 13% premium to Wabco’s market price of shares on the American exchanges. We have done some number crunching to check on what the delisting price could be.

The valuations of Wabco India are already ~ 25% of what ZF Friedrichshafen paid for the entire acquisition of Wabco USA. However, the contribution of Wabco India’s revenues and profits are just 10% of the group’s total. We do not expect a hefty premium from ZF Friedrichshafen over the current valuation of Wabco India.

Note: Technically, ZF Friedrichshafen paid for 75% of Wabco India and it will have to shell out an additional amount for buying out the remaining 25% from the shareholders. Even then, the company has paid a premium.

What if there is no delisting?

While there is no intent of delisting shown, we can expect it because of the existing structure of ZF Friedrichshafen. However, in case there is no delisting at all, then investors don’t stand to lose much as Wabco India’s fundamentals are strong and it has posted strong growth numbers consistently.

Wabco India Delisting Candidate

Strong performance by Wabco India

But, we believe that the market price of Wabco India’s shares will trade in a range over the coming months and irrespective of the results that the company posts, the market will be looking forward to the news on delisting. Our conclusion is that there is not much on the table from the Wabco India delisting play.


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Lumax Industries – Stock Analysis

Lumax Industries is an auto component maker. It is India’s leading manufacturer of front and rear lamps used in motor vehicles. The company’s clients are the manufacturers of two-wheelers, four-wheelers and commercial vehicles. The company’s promoters are the DK Jain family and the Japanese company Stanley Electric. Both hold a 37.5% stake in the company. The company started in 1945 as a trading house and today it has 28 manufacturing units.

 

 

Business Model

The company makes ~ 65% of it’s revenues from front lighting systems and ~ 25% from rear lighting systems. Other accessories make up 10% of the revenues. Passenger vehicles contribute 67% of the revenues and 2-wheelers contribute ~ 27% of the revenues. The company’s top customers are Maruti Suzuki (34%) and Hero Moto (15%). Also, other major clients (Honda, M&M and Tata Motors) have a healthy revenue share.

Raw materials are ~ 60% of the revenue and any fluctuations in the prices of raw materials can have a major impact on margins.

Industry

The fortune of the Auto-ancillary industry is tied to the fortune of the vehicle makers. In developed markets, the auto ancillary market is 100% to 200% the size of the OEMs, but in India it is just 66% to 70% of the OEMs. India has a very low penetration of vehicles as per global standards. There is a good opportunity for the passenger vehicle industry to grow. This would also present growth opportunity for auto ancillary companies. However, the number of components that go into the making of a vehicle will reduce over the next few years. Moreover, the pricing.

Of the 42 major auto ancillary companies (Market cap > Rs 300 Crores), only 17 have made a ROCE > 15% in atleast 7 out 10 years. OEM’s make up 54% of the demand, exports make up 29% of the demand and the balance 17% demand comes from the replacement market. However, there is a lot of competition from the Chinese and the counterfeit products in the market. There is usually a 3-6 months gap in the negotiation of price with OEMs when the raw material prices go up.

Financials

Lumax Industries Stock Analysis - Financial Snapshot

Lumax Industries Stock Analysis – Financial Snapshot

  • In the last 10 years, the company has recorded double digit growth in revenues in 6 years. There was no de-growth in this period.
  • While revenues have almost doubled in the last 5 years, the net profit has shot up from Rs 7.7 Crores to Rs 63 Crores.
  • The interest cost has reduced amidst a rising margin period.
  • The company invests ~ 3% of it’s revenues into R&D.
  • The company paid Rs 58.33 Crores as Royalty, Management support fees and drawing charges to related parties (Stanley Electric). The company pays ~ 2% to 3% every year under these heads to Stanley

The company enjoys a negative working capital requirement. The improvement in margin has led to an improvement in the return metrics (ROE, ROCE and ROA). However, in the last 10 years the company has made a ROCE of more than 15% in just 4 years (including 3 in the last 3 years). The company’s main raw material is polycarbonate. The company imports 40% of it’s raw materials.

Outlook

The share of LED is at ~ 35% and the management’s forecast is that this proportion will increase to 50% soon. The share of LEDs has already gone up from 8% to 35% in the last 2 years. Bharat Stage VI emission norms will come into force from April 2020 and the industry is gearing up for this transit. LED is becoming the first choice of customers and OEMs. The revenues of Lumax Industries have grown in-line with the growth in passenger vehicles. However, the company has been able to give margins a push. The management says that they have focused on lowering costs by reducing imports.

The cost of an LED is 3x to 10x more than that of a conventional headlight. This has resulted in the margins improving along with the rise in share of LEDs. There is also a threat of Chinese LEDs which are cheaper in cost and this will hamper the prospects in the replacement market.

The expected revenue growth over the next 3 years is ~ 8% p.a. However, the margins cannot be predicted here. Although, the last 5 years have been positive for the margins, which have gone up from ~ 4% to ~ 8%. In Q3FY19, the margins rose to 10%.

Valuations

For a business that generated Rs 71 Crores in FY18 and now trades at a market cap of ~ Rs 1,650 Crores, the PE ratio works out to 23. For auto ancillary stocks, we would not recommend investors to invest at such valuations. The margins in the industry are very volatile and a slowdown in the passenger vehicle industry can hit the growth rate. The pricing power is low as it takes time for the company to negotiate pricing. Moreover, the company imports a significant part of it’s raw materials. Thus, any adverse movement in the currency can hit margins.

The LED migration is a reality but the prices of LED lamps will come down to increase in competition. There is not much scope for margin expansion from the current margins. Though we wouldn’t recommend investing in Lumax Industries Stock at current price, long term investors can put the stock on their watchlist.

 


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Gufic BioSciences – Stock Analysis

Gufic BioSciences stock has delivered 20x returns in the last 5 years. This multibagger stock is on the radar of many investors and is a common name in high growth screens. The stock has corrected by ~47% in the last one year. However, in the same period the revenues and profits have consistently grown. Does the recent correction offer a good chance to invest in the stock for the long term?

Gufic BioSciences Business

The company was established in 1970. It has a presence in the pharmaceutical space with it’s products ranging from API’s to bulkdrugs and personal care products. The company is also into the business of contract manufacturing.

The promoter holding has reduced from 69.98% in Q2FY18 to 65.75% in Q3FY19.

Gufic Biosciences Revenue

Revenue Breakup

The share of consumer business has gone down to zero while the formulations (pharma) business’s share rose to > 90%.

Financial Snapshot

Gufic BioSciences Financial Data

Financial Snapshot

  • The company has consistently grown it’s revenues in double digits for the last 10 years.
  • The net profit margins have increased from 2.1% to 5.56%.
  • The fixed-asset turnover has risen from just 3.21 to 13.48! This is a meteoric rise. However, the total asset turnover has increased from 1.05 to just 1.27.
  • Although profitable, the company has reported negative operating cash flows for the last 3 years. Over the last 10 years, the company has earned a profit of Rs 49.16 Crores but the operating cash flows were just Rs 29.11 Crores.

The working capital requirement has become heavier over the years. The WC-to-Revenue ratio stood at 36.1% in FY18. The inventory days have grown to 114 from < 80 till a few years back. The debtors as per FY18 financials were Rs 81 Crores. This figure is nearly 5 times the FY18 profit after tax.

Red Flags

The company’s debtors are given a credit period of 30-90 days as per the management’s comments. However, the receivables due beyond the due dates are very high.

Gufic BioSciences Ageing

From Annual Report of FY18

The receivables due for more than 90 days after the credit period is ~ Rs 16 Crores, which is almost 87% of the FY18 profits. However, the company has just created a provision for Rs 5.85 Crores on the basis of “Due after 6 months of due date”.

Gulfic BioSciences provisions

Under reporting of provisions

The above image is from the Auditor’s Report in the 2018 Annual Report. One has to be careful as the management might be under-reporting the bad debt. The auditors have also flagged off the lack of internal controls in the review of receivables and recoverables.

Weak Internal Controls

Auditor’s Qualification

There are also a lot of related party transactions. The promoter group has interest in many companies which use the name Gufic. Infact, one of the private companies has the name Gufic BioSciences Private Limited. Almost 14% of sales and 10% of purchases are made with Related Parties. Are the promoters running similar businesses using the Gulfic BioScience brand name?

Further, we do not understand the exponential growth in revenues without any material change in the net fixed assets. Gufic BioScience has a fixed asset turnover ratio that would put other pharma companies to shame.

The above chart shows the Fixed Asset to Turnover ratio of mid-size bulk drug makers. Gufic BioScience has a ratio which is way beyond the industry average.

Conclusion

Avoid – Irrespective of growth and valuations.


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Cheviot Company – Stock Analysis

We recently came across Cheviot Company in our smallcap radar. The company’s promoters are the Kolkata based Kanoria family who hold a 74.99% stake in the company. The family has varied business interests in the tea, jute and leather sectors.

Cheviot Company Business

Cheviot Company is primarily in the business of Jute. The company has 2 plants which are located in the 24 Parganas (South) district of West Bengal. Under Jute Packaging Materials Act of 1987, it is compulsory to use 100% jute bags (before November 2018, this was 90%) for packing food grains of consignment size of 10-100 KGs and 20% of jute bags for packing sugar consignments of 25-100 KGs.

Exports contribute ~ 35.5% of the revenues as per FY18 numbers. The export revenues are stagnant since FY12, thus the % share of revenue from exports is going down. Jute sacks have low margins while hessian fabrics and jute shopping bags have higher margins.

Financials

The raw prices of jute affect the prices of finished jute products and thus affects the top-line of the company.

Cheviot Company Financials

5 Year Financial Snapshot

The company’s EBITDA margins are stable and at par with other well run jute companies. Also, the company derives significant other income from it’s investments. In small companies with high promoter holding, we need to look at the remuneration of the directors with respect to the profits and the employee expenses of the company.

Cheviot Company Remuneration

Director’s Remuneration Table

The remuneration spike in FY18 is because of the remuneration being paid to Utkarsh Kanoria. He is the promoter’s son and was appointed as a director in the company in FY18.

Statistical Bargain?

Rs 290 Crores worth of investments

For a company with a market capitalization of Rs 455 Crores, you get net investments worth Rs 290 Crores. That means, you are paying Rs 164 Crores for the core jute business. This business generated a Profit before tax of Rs 50 Crores in FY18. This basically means that the core business is available at a PE of ~ 5. However, considering the slow growth rate and cyclicality of the jute business the PE would be in single digits.

Also, the current Price-to-Book ratio of the company is 0.87. Our view is that the stock trades at a fair value. Moreover, considering the slow growth rates, the stock would not command premium valuations. If we could get the stock for 20% to 25% lower than the current price, we could call it a statistical bargain. Investors can have the stock on their watchlist.

 


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IOL Chemicals Stock Note

IOL Chemicals and Pharmaceuticals Limited

IOL Chemicals was established in 1986. It is headed by Varinder Gupta (Chairman and MD) and Vijay Garg (JMD). Rajinder Gupta, one of the co-founders in 1986 is now the promoter of Trident Ltd. The company derives it’s revenues majorly from Ibuprofen API and Ethlyn Acetate. In FY18, bulk drugs contributed 63% of the revenues, while in FY17 this share was 56%. IOL Chemical has a presence in more than 50 countries across the globe.

Notes

Ibuprofene is a drug that is used to treat pain. BASF’s Texas unit which had a 5000 TPA Ibuprofene API capacity was shut down in June due to technical reasons. Ibuprofene API has an annual demand of ~ 35,000 TPA globally. However, even before BASF’s unit shut down, the Ibuprofene API supply chain was facing issues due to problems in India and then in China.

  • The 3 major Ibuprofene API makers in China. In India, Granules, Solara and IOL Chemicals are the key players.
  • IOL Chemicals has increased capacity from 7,200 TPA to 10,000 TPA in August 2018.
  • The plant is running on 100% capacity due to global supply-side constraints.
  • The domestic demand (India) for Ibuprofene API is ~ 5,000 TPA. IOC Chemicals exports 50% of it’s production.

The price of Ibuprofene API is rising up due to supply-side issues. Now, the drug’s prices are regulated and thus the already wafer-thin margins of final formulation makers are going down. This could result in reduction in production volume of the drug, which is already low priced.

Financials

The company’s revenues have grown at a rapid pace. Although aided by an improving EBITDA margin, the PAT was low / negative due to high debt and interest costs.

IOL Chemicals Financial Snapshot

IOL Chemicals Financial Snapshot

The performance ratios have improved on various parameters in FY18.

IOL Chemicals Financial Snapshot

IOL Chemicals Ratio Analysis

  • For the quarter ended 30th September, 2018 the debt has reduced to Rs 350 Crores vs Rs 422 Crores at the end of FY18.
  • The revenue for H1FY19 was Rs 785 Crores. In H1FY18, the revenue was Rs 433 Crores.
  • The PAT for H1FY19 stood at Rs 52 Crores. In H1FY18, the PAT was just Rs 7 Crores.
IOL Chemicals

Growth Momentum Continues

Invest or Ignore?

The market capitalization of IOL Chemicals is ~ Rs 1,100 Crores. The stock trades at Rs 197.5 (FV:10). The PE Ratio is 14.69.

IOL Chemicals is heavily dependent on Ibuprofene API for revenues. The financials have improved only because of the steep rise in Ibuprofene API prices caused by supply side problems. The revenue and PAT growth is temporary as the market size of the API is also not big. The stock price has appreciated more than 240% over the last one year. This clearly indicates that the good news is factored in. Once the shut units are reopened, the revenues will decline on account of both volume and price. Also, there are red-flags like high promoter salaries, taking related party loans, dilution of equity and high interest costs which don’t work well for retail shareholders. BASF is coming up with new capacities by 2021 which will increase competition for the company.

For long term investors, we would not recommend this stock. However, for those looking for short term positions, the momentum behind the price and revenue can continue for some more time. However, once the correction sets in the stock can melt > 50% in a short time with frequent circuits. So, the allocation should be less and there has to be a stoploss in the trade.

When a stock is rising, we cannot predict the top and the end of the momentum.


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Multibagger Stocks for 2019 and 2020

Multibagger stocks for 2019 and 2020

A multibagger is what every investor dreams of. In true sense, it is getting more than 100% returns from a stock. Usually, investors want these multibagger returns over 12-24 months. The chances of getting a multibagger are higher when the market is bullish (like 2013 to 2017). However, many times good stocks are available for fair value and this gives investors a good opportunity to invest. In this blog, we will discuss few multibagger stocks for 2019 and 2020.

Disclaimer: These stocks discussed in the “Multibagger Stocks for 2019 and 2020” are on our watchlist. But, as on the date of writing this blog, none of the discussed stocks are a recommendation. We encourage all the readers to study these companies further to decide if it suits their risk profile.

Stock #1: Swaraj Engines Ltd.

We recently did a brief analysis of the company on our previous blog post.

Figure in Rs. Crore

Note:

After a dull FY14 to FY16 period, the tractor sales grew (and continue to grow) FY16 onwards. In this period, Swaraj Engines Ltd. has improved it’s EBITDA margin.

The tractor sales in India are expected to grow at ~ 6% p.a. over the next decade. The tractor penetration in India is just 13 per 1000 ha vs 32 per 1000 ha in developed market. As India moves towards more mechanized agriculture, tractor sales have a long runway of growth.

Positives:

  • Debt free, high dividend yield and free cash flow generating company
  • Has maintained string return ratios over the last decade
  • Increased capacity to 115,000 engines p.a. and expanding again to 135,000 p.a.
  • Swaraj tractors owned by Mahindra and Mahindra, which has a 42% market share of Indian tractor market
  • Tractor penetration in India is 13 per 1000 h.a. vs 32 per 1000 h.a. in developed markets

Key Risk Factors:

  • Has just one product and one client who is a related party
  • Heavy dependence on monsoon and policies of the Government
  • A PE Ratio of 21x is not cheap and ideal range should be a PE of < 15

Stock #2: VST Tillers and Tractors Ltd.

The next in our list of Multibagger stocks for 2019 is another agriculture sector company. VST Tillers and Tractors is into the business of making both tilllers and tractors. It stands to benefit from increased mechanization of agriculture in India. The stock has corrected by more than 45% from it’s peak.

Multibagger stocks for 2019

In Rs. Crores

Positives:

  • The company has lined up new launches in the > 30 HP tractor segment
  • Tiller sales to benefit from Government efforts to double farmer incomes by 2022
  • VST Tillers and Tractors Ltd. is a high asset turnover, free cash flow generating company
  • Although the industry is cyclical, the efficient working capital management and sound fundamentals help the company sail through slow years

Key Risk Factors:

  • The company’s revenues are heavily dependent on subsidies by the State Governments
  • VST Tillers and Tractors is losing market share in the tractor segment to other players
  • Slow years could see the PE slide down to 10x to 12x

Stock #3: PVR Ltd.

The number of people watching movies in multiplexes has grown exponentially over the last decade. Also, this growth is expected to continue (although slower) over the next decade as well.

Multibagger stocks for 2019

In Rs. Crores

Positives:

  • The company has constantly improved margins and return ratios over the last 5 years
  • PVR Ltd stands to benefit from the structural shift towards higher urbanization of masses and also from higher per capita spending
  • The management expects to add 90 screens in FY19 under the PVR Brand

Key Risk Factors:

  • The promoter’s (Bijli) name appeared in the Panama paper leaks raising red flags
  • The business is capital intensive and requires a lot of capex to increase presence
  • The management as relied on debt as internal accruals were not enough to expand
  • The Government policy on allowing outside food in multiplexes can crush revenues

Stock #4: Westlife Development

Westlife Development is a good investment for those bullish on the Quick Service Restaurant (QSR) space. The company operates McDonald’s restaurants in west and south India.

Multibagger stocks for 2019

In Rs. Crores

Positives:

  • QSR industry in India stands to benefit from more women in the workforce and higher spending by the masses
  • McDonalds is a low ticket restaurant and stands to benefit the most from increased spending
  • The appearance of delivery startups like Zomato, Siwggy and Uber Eats has helped these companies push up volume growth
  • After two tough years (FY15, FY16 and FY17), the QSR industry has improved performance in FY18 (as evident from the performance of other players like Jubilant Foodworks)
  • The management is targeting EBITDA margins of 14% to 15% which double of current margins

Key Risk Factors:

  • The management has been suspected of rigging stock price over the last decade
  • The company has low ROCE / ROE since FY13 and very companies manage to turn around from such a mess
  • The market currently expects a strong growth in revenues along with sharp rise in margins over the next 2-3 years. However, this confidence might go with just one bad quarter. In that case, there could be a sharp re-rating of the stock.
  • Local players flourishing due to delivery startups have lean business models and pose a threat to the branded QSRs.

Stock #5: Hexaware Technologies

Multibagger stocks for 2019

In Rs. Crores

Hexaware Technologies is a mid-cap IT company. Smaller IT firms are trying to use more automation to win clients from the legacy (read larger) IT companies. The stock has corrected ~ 43% from it’s peak within 4 months.

Positives:

  • The growth guidance in USD terms is 10% to 12%. The stock trades at a PE of 16.35
  • The company has a strong track record of generating high ROE and free cash flows
  • The company has a net cash of Rs 25 per share

Key Risk Factors:

  • The demand from large clients in USA (Mostly onshore) is strong but there are supply side issues. The supply issues stem from the US labour market conditions and visa issues.
  • A stronger rupee can hurt the bottom-line. However, this risk applies to every USD earning company.

So, these are our 5 Multibagger stocks for 2019 and 2020. We may or may not recommend them but we also have other fantastic stocks on our watchlist. Which companies from your watchlist have the potential to become Multibagger stocks for 2019?


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