Friday, September 30, 2005

IPO - Suzlon Energy

Suzlon is by far the largest wind-energy provider in India, a lucrative and under-served market for renewable energy. It is also the sixth largest such company in the world.

What I Like

  • The company holds a strong and sustainable position in a growing market where barriers to competition (need for an impeccable track record and significant capital to bid for projects) are high. Further, India is a potentially huge market for wind energy and there’s plenty of room to grow domestically. And petroleum prices are shooting through the roof, making renewable energy even more attractive
  • Suzlon has captured 3.9% of the global market this year, which is much better than the 1.9% it has of the cumulative installations till date. This means it is actually increasing its share of the pie, a very encouraging sign
  • Further, the company has demonstrated sales and profits growth of 54% and 47% respectively on a cumulative basis for the past 4 years, which compares quite well with the issue PE range of about 29-34

What I don't Like

  • The EBITDA / EV margin is in the range of 11%-13% for the issue price band, which, unfortunately is a bit low for a relatively high-risk business. Wish the company had been able to bring it up to at least 15%
  • The company has re-stated its numbers due to changes in its accounting policies. The cumulative effect of these changes has been to increase the profits for the last year by Rs. 204 mn leading to an EPS increase of about 66p, which is significant. While the accounting changes are probably all right, I’m sure the fact that they led to increases in profit was a big factor in approving these changes. Sneaky!
  • The Price to Book ratio for Suzlon is around 12, whereas the same is in the range of 3-10 for its peer group companies. A P/B ratio of 12 is very high and would be an immediate disqualification for conservative investors
  • Being sixth (with a tiny market share of about 1.6%) in a relatively small global market means Suzlon will have to really work at its strategy in order to grow faster than the market and move into the big league. The top player in this market has twenty-two times it market share and even the 5th largest has five times the market share of Suzlon.

In Summary

Apply if you like ‘growth’ stocks that with potentially significant upside (though at a high risk) – and even then go for the lower end of the band. Those willing to hold it for many years will definitely reap huge benefits - after all the market will really explode when the cost of wind energy comes close to that of fossil fuels.

Don’t touch it if you are risk-averse or if you have a short horizon.

Friday, September 23, 2005

Value Pick - The Coming of Zicom

I first stumbled across this company ( when I was surfing the net for home security solutions. And I was instantly hooked!

Well Worth Watching

This tiny concern has a lot going for it, investment-wise.

  • It's in a niche sector and getting to a dominant status with growing brand recognition and appeal
  • A slew of products and partnerships catering to the security needs of organizations
  • An impresive and growing client list
  • A recent product cum service offering targeted towards home users, priced attractively on a monthly payment model
  • Improving financials - better margins, better ROCE / RONW, fairly low debt (rising, but that is to be expected with a growing company)

I believe it has ample room to grow given the focus and attention that Indian corporations are now giving to security.

I also expect the home user offering to be simply lapped up by the well-to-do. At a couple of thousand a month, even I can afford it and it comes with the 'cool' factor that's likely to appeal to the upwardly-mobile, urban male. Wait for a few years and watch the home security market explode!

A Tad Over-Priced

It's difficult to price this company, just as it is with all small-caps. There isn't a sufficiently long track record to base one's opinions on unlike with, say, an ITC. However, we can take a guess.

Today's price (even after the Sensex fall yesterday) is about Rs. 150, which implies a PE ratio of 22.5, approximately in line with historical earnings growth. This is a little too high for my liking, though the good news is that quarter-on-quarter growth seems to be over 30% and RONW is nice and healthy.

Ideally, I'd have liked to buy the stock at Rs. 125-130, though I must confess that when I first saw it at that level I wanted it below Rs. 100! Just shows you what we value investors are like - never happy!

I expect Zicom to reach at least Rs. 165 around April next year. Hence, in my opinion, it is an OK buy at Rs. 150 and a great deal at Rs. 125. Hold it for longer and the story should get better once the company attains some scale and gets noticed by the fund houses.

So set your limit orders, sit back and enjoy.

Current Market Price: Rs. 150

Tuesday, September 06, 2005

iFlex - A Good Time To Sell

I sold my iFlex shares yesterday.

The company has rewarded me well - I especially enjoyed the run-up in the price after the Oracle news - but it seems to me that it has gone too far ahead of its real value for one to hold on any longer.

Valuation Seems High

  • PE stands at around 35 but the company has only grown at about 23% CAGR over the past 5 years. Average PE over the past 5 years has been around 25
  • EPS growth has slowed down over the past couple of years
  • RONW has consistently fallen from about 35% in 2002 to around 18% now, a huge drop, especially given the fact that book value has not really been growing very fast either
  • Oracle's open offer (based on their assessment of the company's value) is much below current market price

Prospects Not Clear

  • iFlex has so far been a leading player in universal banking software, which is usually purchased by mid-tier banks. Given the company's phenomenal success over the past few years, it has actually covered large parts of its traditional market in Middle-East and Africa. In order to grow it now needs to look at the US and Europe, which are much more competitive markets and have several established, dominant banking systems players
  • The company has shown greater growth in the services space than in products, making it more of a mainstream IT player and bringing it in direct competition with the Wipros, Infys, TCSes and Satyams of the world
  • The ability of iFlex to move into large banking solutions through the good offices of Oracle might be a little over-rated as Oracle works closely with many of the other leading banking software vendors as well

The way forward for iFlex is fraught with a lot of uncertainity and it seems more prudent to sell at what seems to be a high and wait for iFlex's strategy to become clearer over the next year or so.

Current Market Price: Rs. 970

Monday, September 05, 2005

Value Pick - Torrent Cables

Hello world! Like the proverbial bad penny, I’ve turned up again – and just when you thought it was safe to venture into the blogosphere! Sorry for not writing these past few weeks but I’ve been a bit preoccupied with shifting hearth and home overseas. Hope you weren’t feeling too lost without my insights into the stock market ;-)

Anyway, here I am with another long-term recco. This time it’s a small cap company, Torrent Cables.

I bought this stock almost exactly a year back, when it was quoting at Rs. 50 and it has rewarded me handsomely, appreciating about 5 times since then. And the story is not yet over, methinks.

A Turnaround Story

Torrent Cables is part of the USD 550 mn Torrent group of companies and a sister concern of the better-known Torrent Pharma. It is in the power cables space and, as of 2001, it was struggling to keep itself afloat. Things reached such a state that it was referred to the BIFR (Board of Industrial and Financial Reconstruction) in 2001, where it was financially overhauled over two years.

Torrent Cables emerged in 2003 a leaner, fitter entity and there’s been no looking back since then.

Remarkable Improvement in the Numbers

  • EPS has grown from 4.16 in 2002 to 19.88 in 2005 – an increase of almost 5 times in 3 years, yielding a CAGR of about 68% year on year
  • Book value has grown from –0.08 in 2002 to 46.48 in 2005. It has actually doubled in the last year itself
  • The company has declared a dividend for the first time in 5 years this year (only 2 rupees per share but that indicates management confidence in sustainable earnings and also that the company has better ways to invest the remaining profits)
  • Operating profit margins have improved from 17.43% in 2002 to 21.51% in 2005
  • Net profit margins have improved from 5.91% to 10.96%
  • RONW has improved from 20.39% (already quite good) to a whopping 43.61%
  • Best of all, debt-equity ratio has declined from 2.07 (high debt) to 0.08. This is also reflected in the interest cover, which now stands at a very healthy 26.20

Why is it Still A Good Buy?

  • Torrent Cables is in a business related to the infrastructure sector, which itself makes it worth a look. It has a long and pretty impressive client list, as can be seen on the company web site
  • Financials have been steadily improving (as can be seen from the above discussion)
  • The stock is currently trading at a PE of about 12, which gives it a PE to growth (PEG) ratio of 0.2 indicating under-valuation relative to its growth rate
  • Torrent Cables seems undervalued when compared to its peers as well – Universal Cables is at a PE of about 70 and some of the others are actually loss-making
  • It has shown a quarter-on-quarter growth rate of about 35% in EPS for the quarter ended June 30, 2005
  • Mutual funds and FIs have so far not been significant shareholders in the company, probably because of the really low market cap of this company, which made it an unattractive institutional buy till now. Only in the past 3-4 months have a couple of funds invested in it to the extent of about 7% of the company, indicating that the stock is now on the mid-cap fund radar. Once the market cap increases a bit more (from the current 120-odd crores to about 150-200 crores), I expect more institutional interest and hence a significant revaluation of the stock upwards.

If the stock PE is revalued higher to at least 15 (seems reasonable based on past and expected growth rates) and the earnings grow by about 30% as seems to be indicated, we can expect the stock price to go up by at least 40-50% over the next year, which is quite attractive.


Downside seems limited as the company is showing impressive growth and the PE is low. Financial ratios are attractive and, even if they may not improve significantly beyond this point, amply justify the investment. A note of caution for Graham-style, ultra-conservative investors - the price to book value is very high at about 5.

The risk is probably more on the market side. If the Sensex loses steam, midcap stocks in general will see a sharp slide in prices. This should, however, make Torrent Cables even more attractive in the long run.

Current Market Price: Rs. 246