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.

Risks

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