MOLD TEK PACKAGING---dividend plus growth

MOLD TECH PACKAGING  bse code 533080

CMP AROUND 62, MARKET CAP 49 CRORES

The company is the leader in manufacturing plastic packaging products including pails.  It specialises in both standard and made to order packaging solutions for industries like paints, lubricants, cosmetics, pharmaceuticals etc.

In a new development the company is venturing into providing packaging solutions for icecreams by making tubs for packing ice creams and orders for the same have started from players like Baskin robbins and other ice cream brands.

The company has for the first time in India introduced In Mould Labeling (IML) decorating system to expand the product range.

MANUFACTURING FACILITIES

Company has five manufacturing units out of which 3 are located in Andhra Pradesh, one in tamilnadu and one in Daman.  The Daman facility is expected to come on stream in Dec 11 and would lead to around 50% hike in total capacity.

FINANCIALS

Current equity is around 8 crore with 80 lac shares outstanding.   Promoters allotted themselves and others 22 lac warrants convertible into equity shares at a price of around Rs  45 back in Aug 2010 which when converted will lead to total no of outstanding shares to 1.02 cr shares.

Debt as on march 11 was 42 crores.

It holds 10% stake in Mold Tech Technologies whose market cap is around 31 crores.

LAST THREE YEARS PERFORMANCE

YEAR	08	09	10	11
SALES	97	113	131	164
PBT	3.8	4.6	11	12
NP	3.3	3.7	7.36	8

EPS on fully diluted equity comes to 7.5 for fy 11.

Results for q1 fy 12 have been quite encouraging.

Sales is up 34% while PAT is up 35%.

quarter       q1 fy 12      q1 fy 11    fy 11(12 months)

sales              56              42               164

PBT               6.15          4.12              15

NP                 3.5            2.6                  8 

DIVIDEND

Dividend declared for fy 11 is Rs 5 per share.   Rs 2 declared in may 2011 and already paid and Rs 3 declared recently to be approved by AGM and yet to be paid. At this dividend payout, the dividend yield at cmp works out to around 8%. The catch in this dividend yield is that it needs to be seen whether this kind of dividend and dividend payout is maintained in next few years.

The company has paid dividend of Rs 3 for fy 10 and Rs 2 for fy 09. So the dividend  amount continues to increase.

POSITIVES:

Company has been showing consistent growth in past 3 years.

Available at cheap valuations for a company showing consistent growth.

Good return ratios

If first quarter is anything to go by then fy 12 maybe much better than fy 11.

High dividend yield of 8% if total dividend is considered for calculation of div yield.

NEGATIVES:

High debt

Company is dependend on the fortunes of the user industries.

Promoter warrant conversion will lead to some equity dilution.

DHANLAKSHMI BANK -- contra bet.

DHANLAKSHMI BANK

Dhanlakshmi Bank is a very old bank set up in Kerala in 1927.  Mr Raja Mohan Rao had a majority stake of 37% in 2007 in this bank but due to this there was no professional management to steer the bank in a proper direction. In 2007, a German bank and some foreign funds bought majority of Mr Rao’s stake and they installed the former SEBI chief Mr G N Bajpai to run the ship.

Since the last three years, Dhanlakshmi Bank has grown its deposit base by 4 times and loan base by 3 times.  This has been done under the leadership of Mr Amitabh Chaturvedi  who took over the helm of affairs since Oct 2008 and has transformed the outlook and working of the bank from being a traditional South based bank to a more modern professional outfit.  In these years the net profits have grown only 3% CAGR.

CMP 108 MARKET CAP 915 crores

Fy 11 book value close to  Rs 100 per share.

Outstanding shares are 8.51 crore shares of Rs 10 each.

LAST FIVE YEARS RESULTS

YEAR	07	08	09	10	11
Int earned	248	312	408	534	906
NP	16.14	28.46	57.45	23.3	26.06

EPS FOR FY 11 WAS AROUND 3 PER SHARE.

DIVIDEND FOR FY 11 WAS DECLARED AT 50 PAISE PER SHARE.

LAST SIX QUARTERS RESULTS

Quarter	Dec 09	Mar 10	Jun 10	Sep 10	Dec 10	Mar 10
Int earned	140	150	168	192	250	296
OP	2.8	11.7	9.15	12	17.65	28.6
Provisions	2.75	4	2	8.2	7.9	9.5
NP	1.3	5.6	6	1.62	7.26	11.15

Coming to some data regarding the bank, as on March 11, the bank had a customer base of 16 lac  and the net NPA to advances was down to 0.3%.   At the end of FY 11 the gold loans formed around 34% of total loans and mortgages formed another 22% of total loan book.

For FY 11 the ROE was 4.8% and ROA was low at 0.4% . These are expected to improve significantly in line with increasing profitability of the bank due to stabilisation of operations , higher productivity per employee and modernisation. 

Some advantages that Dhanlakshmi has over peers are

1.       There is lower level of unionization of employees at Dhanlakshmi Bank as compared to Federal Bank or South Indian bank.

2.       Dhanlakshmi Bank is on the cusp of a strong turnaround in fortunes and its key operating parameters.

3.       Lower base effect reduces the systemic risks for Dhanlakshmi Bank.

Some key opportunities for Dhanlakshmi Bank are

1.       its loyal customer base, new and aggressive top management

2.        good growth opportunities in newer geographies, 

3.       technology upgradation leading to acquisition of new customers which were not targeted earlier

4.       Rebranding and marketing are likely to improve awareness about the bank.

5.       Cost efficiency measures implemented by the bank can lead to higher profitability for the bank.

6.       Distribution agreements forged with various fund houses like birla sunlife, SBI MF, Principal MF etc is likely to increase fee based income.

RISKS

1.       Inability to raise capital will necessitate the bank to lower its growth targets. The postponement of QIP  recently has led to a weakness in the stock price currently.

2.       Slowdown in economy may raise headwinds for the bank.

3.       Till date the asset quality of Dhanlakshmi Bank has been good but any deterioration in asset quality might be a risk.

4.       Inability to contain and reduce operating costs would be a risk.

Investment in Dhanlakshmi Bank is a sort of contra investment bet.   If the management achieves its targeted growth and higher operational efficiency due to the measures taken, then this investment could offer good returns.

Conventional wisdom is to look at the poor return ratios of the bank and negative sentiments arising out of postponement of the qip issue and reject the investment hypothesis. But a contra look would entail looking at 2-3 years down the line and consider the investment.   I feel some amount of contra bet is advisable here.  Risk reward for long term investors looks favourable.

GOLD LOAN COMPANIES-- MUTHOOT AND MANAPPURAM FINANCE

GOLD LOAN COMPANIES

INDIA IS A HUGE GOLD MARKET ESTIMATED TO HOLD AROUND 10% OF WORLD’S TOTAL GOLD STOCK.    LOANS AGAINST GOLD PLEDGING IS A VERY OLD BUSINESS AND IT IS ASSUMED THAT AROUND 10% OF THE TOTAL GOLD STOCK IS PLEDGED AGAINST LOANS.  THIS BUSINESS IS A HUGE BUSINESS AND THE ORGANISED MARKET HAS ONLY 25% OF THE MARKET SHARE OF OVERALL  GOLD LOAN MARKET, REST ACCOUNTED BY THE UNORGANISED MARKET.  

ORGANISED GOLD  MARKETS HAVE GROWN BY AROUND 40% CAGR IN THE LAST 8-9 YEARS.  THE MAIN BENEFICIARIES OF THIS BOOM HAVE BEEN TWO PROMINENT COMPANIES NAMELY MUTHOOT FINANCE AND MANAPPURAM  FINANCE.   BOTH HAVE GROWN AT A TREMENDOUS PACE IN THE LAST FEW YEARS.  

BOTH THESE SPECIALISED NBFC SCORE OVER BANKS IN THE GOLD LOAN BUSINESS BECAUSE OF CUSTOMER PREFERENCE FOR THESE NBFC.  MAIN REASONS FOR THIS PREFERENCE ARE  LOW LEVEL OF DOCUMENTATION, QUICK DISBURSAL OF LOANS, HIGHER LTV OFFERED , EASE OF ACCESS TO THESE NBFC, PERCEPTION OF HIGHER SAFETY OF ORNAMENTS , FLEXIBILITY OF LOAN TENURES ETC.

BOTH THESE COMPANIES HAVE HAD A DREAM RUN IN TERMS OF THEIR FINANCIAL PERFORMANCE BUT THEY ARE EXPECTED TO FACE SOME HEADWINDS GOING FORWARD.

FIRST, THE HIGHER BASE EFFECT IS LIKELY TO PLAY OUT AND HENCE GROWTH FIGURES SHOULD SHOW SOME MODERATION AS COMPARED TO EARLIER.

SECONDLY, THE COMPETITION IN SOUTHERN MARKET IS INCREASING.

THIRDLY, THE RBI GUIDELINES WHICH REMOVED THESE INSTITUTIONS FROM PRIORITY LENDING SEGMENT IS LIKELY TO PLAY SPOILSPORT FOR THEM.

AND FINALLY FUNDING COST OF THESE INSTITUTIONS IS LIKELY TO BE HIGHER WHICH WOULD PUT PRESSURE ON THE NIM – NET INTEREST MARGINS OF THESE COMPANIES.

THE ABOVE FEARS HAVE LED TO A BIG UNDERPERFORMANCE BY THESE COMPANIES IN TERMS OF THEIR STOCK PRICES.

MUTHOOT FINANCE

CMP 162  BOOK VALUE 62

THIS IS THE BIGGEST GOLD LOAN COMPANY IN INDIA.  IT HAD RECENTLY COME OUT WITH ITS IPO AT A PRICE OF 175 AND WAS WELL SUBSCRIBED BY THE INVESTING COMMUNITY.  POST ITS IPO, THE STOCK HAS BEEN UNDERPERFORMING WITH THE STOCK PRICE HITTING A LOW OF AROUND 150 AND CURRENTLY IS RULING AT AROUND 162.   BASED ON CURRENT MARKET PRICE THE MARKET CAP OF MUTHOOT FINANCE IS 6086 CRORES.

FINANCIALS

YEAR	06	07	08	09	10	11
OP INCOME	145	230	366	615	1077	2298
PBT	41	70	97	148	345	761
NET PROFIT	27	44	64	98	227	494

ROE FOR MUTHOOT HAS BEEN WELL ABOVE 30% AND ROA IS WELL ABOVE 3. 

THERE COULD BE SLIGHT MODERATION IN THESE RATIOS GOING FORWARD DUE TO CONTRACTION IN NIM DUE TO HIGHER FUNDING COSTS.

MANAPPURAM FINANCE

THIS COMPANY HAS BEEN LISTED SINCE MANY YEARS AND HAD A STRONG RUN UP IN NOV 2010 WHEN IT POSTED A HIGH OF 95 (ADJUSTED FOR SPLIT) AND SINCE THEN HAS BEEN UNDERPERFORMING.

BOOK VALUE IS 23 AND MARKET CAP OF MANAPPURAM IS 4714 CRORES.

FINANCIALS

YEAR	06	07	08	09	10	11
OP INCOME	20	43	79	165	477	1178
PBT	6	16	32	46	182	424
NET PROFIT	4	10	21	30	120	282

ROE HAS BEEN IN EXCESS OF 20-25% AND ROA ARE ABOVE 4%.

MANAPPURAM HAS RAISED CLOSE TO 800-900 CRORES BY WAY OF QIP AT A PRICE OF 84 DURING FY 11. THIS SHOULD HELP IT SUSTAIN ITS GROWTH TO SOME EXTENT.

COMING TO INVESTMENT THESIS IN THESE COMPANIES,

1.       THE BUSINESS IS EASY TO UNDERSTAND FOR THE INVESTOR

2.       THE DEMAND FOR GOLD LOANS IS GOING TO REMAIN ROBUST

3.       THE ORGANISED MARKET IS SLATED TO CONTINUE GROWING AT THE COST OF THE DOMESTIC MONEY LENDERS

4.       EVEN WITH REDUCTION IN NIM THESE COMPANIES ARE LIKELY TO SUSTAIN GOOD GROWTH IN REVENUES AND PROFITS

5.       THERE SEEMS TO BE A DISTINCT GAP BETWEEN THE PERCEIVED FEARS OF THE MARKETS AND THE ACTUAL SITUATION FOR THESE COMPANIES.

6.       ANY CHANGE IN THE INTEREST RATE CYCLE WOULD BE VERY BENEFICIAL FOR THESE COMPANIES.

7.       THERE IS  HUGE SCALABILITY AND OPPORTUNITY IN THIS BUSINESS WHICH TILL DATE IS A VIRTUAL DUOPOLY BETWEEN THE ABOVE COMPANIES.

NEGATIVES

1.       ANY GOVT POLICY INTERVENTION FIXING A CAP ON THE INTEREST CHARGEABLE BY THESE INSTITUTIONS IS LIKELY TO PLAY SPOILSPORT FOR THEM.

2.       HIGHER FUNDING COSTS IS LIKELY TO AFFECT NIM AND HENCE PROFITABILITY.

3.       SHARP CORRECTION IN GOLD PRICES OF THE MAGNITUDE OF MORE THAN 20-25% COULD AFFECT THESE COMPANIES.

LOOKING AT THE ABOVE SYNOPSIS IT SEEMS THAT INVESTMENT IN THESE GOLD LOAN COMPANIES IS LIKELY TO BE REWARDING FOR INVESTORS HAVING A CONTRARIAN MINDSET OF INVESTMENT.

PI INDUSTRIES LTD

PI INDUSTRIES  BSE CODE 523642

EARLIER KNOWN AS PESTICIDES INDIA LTD, AND INCORPORATED IN 1947, THE COMPANY HAS TWO MAIN REVENUE STREAMS:

1.       AGROCHEMICALS

IN  AGROCHEMICALS, THE COMPANY IS A LEADING PLAYER IN THE AGRO CHEM SPACE WITH A UNIQUE MODEL OF OUTLICENSING PATENTED MOLECULES FROM MNC COMPANIES AND LAUNCHING THEM IN INDIA.  ITS FLAGSHIP BRAND IS NOMINEE GOLD WHICH HAS ATTAINED A LEADERSHIP STATUS IN THE RICE HERBICIDE SPACE.    IN THIS SPACE THE COMPANY HAS STRONG DISTRIBUTION REACH WITH MORE THAN 1500 DISTRIBUTORS AND SELLS ITS PRODUCTS THROUGH 25000 RETAILERS.

2.       CUSTOM SYNTHESIS

THE COMPANY IS  A PREFERRED PARTNER FOR MANY MNC COMPANIES TO DO CUSTOM SYNTHESIS OF THEIR PATENTED MOLECULES DUE TO THE STRENGTHS IN PROCESS RESEARCH AND MANUFACTURING.   THE COMPANY ENTERS INTO THESE CONTRACTS ESPECIALLY DURING EARLY PART OF THE LIFE CYCLE OF  MOLECULES WHERE THE MARGINS ARE HIGHER.  CURRENTLY THE ORDER BOOK OF THE COMPANY IS IN EXCESS OF  300 MILLION USD TO BE EXECUTABLE OVER THE NEXT 3-4 YEARS. THIS DIVISION IS LIKELY TO BE THE GROWTH DRIVER OF THE COMPANY GOING FORWARD AND MARGINS HERE ARE ALSO BETTER.

IN BOTH THE ABOVE SEGMENTS THE COMPANY HAS SHOWN ITSELF TO BE A RELIABLE TRUSTWORTHY PARTNER FOR ITS FOREIGN CLIENTS WITH A NO CONFLICT BUSINESS MODEL.

FINANCIALS:

THE EQUITY CAPITAL IS AROUND 12 CRORES WITH 1.2 CR SHARES OF RS 10 EACH OUTSTANDING .

CURRENT MARKET CAP IS AROUND 900 CRORES.

PROMTERS HOLDING IS AROUND 63% WITH NO PLEDGING. STANCHART PE HOLDS AROUND 15% WITH ROWANHILL INVESTMENTS HOLDING 9%. ALONG WITH OTHER HNI AND ALL THE ABOVE HOLDING THE TOTAL HOLDING COMES TO AROUND 90% DUE TO WHICH THE FLOATING STOCK IS LIMITED.

TOTAL DEBT IS AROUND 248 CRORES AS ON MARCH 11. CASH ON HAND IS AROUND 50 CRORES.

ROE  FOR FY 11 IS AROUND 35.

YEAR 2006 2007 2008 2009 2010 2011 SALES 268 319 376 462 542 719 OP 17.4 21.53 27.4 52.81 74.3 108 OPM 6.49 6.74 7.28 11.43 13.7 15 NP 4 4.5 6.3 23 41 64 EPS 33 51

RECENT DEVELOPMENTS

1.       THE COMPANY ALSO HAD A POLYMER DIVISION WHICH WAS A LOW MARGIN BUSINESS AND THE COMPANY SOLD IT OFF TO A FRENCH COMPANY RHODIA SA FOR A CONSIDERATION OF AROUND 70 CRORES. THIS MONEY WOULD BE UTILISED TO EXPAND THE EXISTING BUSINESSES.

2.       THE COMPANY HAS ACQUIRED LAND IN STERLING SEZ IN JAMBUSAR NEAR BARODA AND WILL DEVELOP ENHANCED CAPACITIES FOR CUSTOM MANUFACTURING TO CATER TO THE EXISTING AND EXPECTED ORDER BOOK.  A TOTAL AMOUNT OF 125 CRORES HAS BEEN EARMARKED FOR THIS.  MOST OF THE INVESTMENT IN THIS PROJECT WOULD BE FOR THE CUSTOM SYNTHESIS BUSINESS.

3.       THE COMPANY HAS ESTABLISHED A RESEARCH CENTRE IN COLLOBORATION WITH SONY CORP JAPAN . THE CENTRE WILL BE ENGAGED IN THE DEVELOPMENT  OF COMMERCIALLY VIABLE PROCESSES FOR MOLECULES INVENTED BY SONY.  WITH THIS SONY HAS RECOGNIZED THE ABILITIES AND COMMITTMENT OF PI INDS. THE OUTCOME OF THIS RESEARCH CENTRE WOULD BE TO FIND USE OF FUTURISTIC PRODUCTS LIKE FLEXIBLE TELEVISION, SOLAR CELLS ETC.

AS PER THE ORDER BOOK STATUS AND SOME RESEARCH REPORTS, THE COMPANY IS EXPECTED TO SHOW GOOD PROFIT GROWTH OF AROUND 35-40% CAGR FOR THE NEXT 2-3 YEARS.

AT CURRENT MARKET PRICE OF AROUND 715, THE STOCK IS AVAILABLE AT A PE OF AROUND 10 BASED ON EXPECTED EPS OF 70 FOR FY 12.

LOOKING AT THE GROWTH PROSPECTS WITH THE COMPANY ENTERING  HIGHER GROWTH TRAJECTORY , THIS COULD BE CONSIDERED FOR INVESTMENT WITH A 3-5 YEAR VIEW.

POSITIVES:

1.       COMPANY IS ON THE CUSP OF EXPLOSIVE GROWTH FOR THE NEXT FEW YEARS.

2.       AVAILABLE AT REASONABLE VALUATIONS OF AROUND 10-11 TIME FY 12 EXPECTED EPS OF AROUND 70.

3.       MANAGEMENT HAS PROVEN ITSELF OVER THE YEARS GUIDING THE COMPANY ON THE PATH OF GROWTH AND GETTING RECOGNITION FROM ENTITIES LIKE SONY CORP AND WINNING TRUST OF VARIOUS MNC CLIENTS.

4.       SALE OF THE LOW MARGIN POLYMER BUSINESS HAS TWIN ADVANTAGES OF BRINGING IN CASH FOR EXPANSION OF REMAINING AGROCHEM AND CUSTOM SYNTHESIS BUSINESS AND WILL ALSO HELP IN EXPANDING MARGINS GOING FORWARD AS THE MARGINS IN BOTH THE ABOVE BUSINESSES ARE HIGHER AND EXPECTED TO IMPROVE FURTHER.

NEGATIVES:

1.       ANY DELAY IN EXPANSION COULD AFFECT THE COMPANY’S REVENUES.

2.       COMPANY HAD HIGH DEBT OF AROUND 240 CRORES AS ON MARCH 11 WHICH IS LIKELY TO GET ADDRESSED DUE TO BETTER WORKING CAPITAL MANAGEMENT AND CASH TO BE RECEIVED FROM RHODIA FROM SALE OF POLYMER BUSINESS.

3.       LIQUIDITY OF THE COMPANY’S SHARES IS VERY LOW  WHICH COULD BE CONSTRUED AS A RISK FACTOR.

4.       VERY POOR MONSOONS COULD AFFECT THE COMPANY’S PROSPECTS ESP IN THE AGROCHEM BUSINESS.

TECHNICALS:

AFTER POSTING A RECENT HIGH OF 797 IN APRIL 11, THE STOCK IS CONSOLIDATING IN THE RANGE OF AROUND 690 TO 750 CURRENTLY.

Acknowledgement:  This stock has been brought to my notice by Mahesh Shah who is an equity analyst.