Peace and goodwill

GUEST COLUMN

Mudar Patherya brings Christmas gifts to his readers.

Santa Claus sent me a message: 'Sledge leaves early. Load all your cargo by 10 December'. So this is what goes into my parcel to be distributed liberally across whoever chances to read my column or happens to pass within three metres of anyone who reads my column or anyone who hears of what I have written or even anyone who hears from anyone who hears of what I have written.

ANG Auto: One important recent amendment in road discipline in India has evolved the kismet of this company: the government stipulated that no truck would be loaded beyond 9 tonne.

This created the need to latch trailers on to trucks, which could not only carry additional cargo but do so at a significantly lower cost than what a transporter would have paid to buy another truck.

ANG comes in with two credentials that warrant attention: one, it is the largest trailer manufacturer in India; two, it is an integrated manufacturer accounting for a significant value-addition.

However, I must state that the impatient soul has been a trifle disappointed with ANG's performance.

The company's profits were stuck in a groove of Rs 5 crore and Rs 5.9 crore for four quarters until it dropped to Rs 4 crore in July-September 2007 on an equity of Rs 11.9 crore (fully diluted taking all conversions into account). Result: bull liquidation down from the high Rs 300s to a low of Rs 122.

Official reasons for the underperformance: Ashok Leyland had promised to pick up 300 trailers a month which did not happen; the rupee appreciation knocked off a clean 12 per cent of the top line; new contracts were delayed.

Now the good news: The company has gone independent in trailer marketing. Trailer production starts rising from this quarter: output in the second half of this financial year could be a shade less than three times what the company reported in the first half; trailer production in 2008-09 could be double of what the company may report in 2007-08.

The launch of the tip trailer has begun to strengthen margins. The manufacture of axles began in September 2007 reinforced by a US order.

So what are the probable numbers? My understanding is that net profit should be around Rs 22 crore in the current fiscal (not a long call really) and next year, when the full blast of production should be available, the post-tax bottom line should be anything between Rs 32 crore and Rs 35 crore.

Why this qualifies as a Santa handout is that concurrent with the earnings increase I see a P/E increase. Fancy valuing India's largest trailer manufacturer at 6x for 2008-09 earnings!

Lok Housing: My simple pitch for Lok Housing is that DLF quotes at a market cap of Rs 162,000 crore, Puravankara at Rs 9,600 crore, Parsvnath at Rs 700 crore and Lok at a mere Rs 1300 crore (after factoring in fully diluted equity of Rs 42 crore following intra-group mergers).

I call it the failure of a management to convey its deep intrinsic value to a shareholder community; I call it the failure of a management which does not bother to reply to emails and faxes from yours truly wanting to investigate this colossal aberration.

There are various ways you can look at this story. Forget the earnings route. Consider this instead: It has a land bank of 2,700 acre following the scrapping of ULCRA in Maharashtra. Assume a conservative Rs 5 crore per acre. Ensure you have a calculator that goes into the high numbers.

Pray then is there something that I don't know about the company, promoter, land bank, receivables, receptionist....

Oil Country Tubular: For years, OCTL just sat right there with a large equity, a large loss and a large liability. Leper stock.

One infrastructure boom later and the picture has changed and how: In the December 2007 quarter, the company reported a loss of Rs 69 lakh; profit for the September 2007 quarter was Rs 13.91 crore on an equity of Rs 44.29 crore.

Correspondingly, an EBIDTA of 7 per cent has more than quadrupled to 31 per cent (think!) in the space of three quarters; interest outflow has declined from Rs 4.77 crore to Rs 3.93 crore during the period. In my mind, this is an inflection moment of the company. No less.

OCTL comes with fair credentials: it is one of the leading companies in the world (company's claim, not mine) of oil country tubular goods that find application in the oil drilling and exploration industry.

If you think that these fundamentals and transition would be reflected in the market cap, then you would be mistaken. The world, strangely, is still a doubter. I am a simple man. I think OCTL will annualise its September 2007 earnings going ahead.

This means that the company should hypothetically report an EBITDA (earnings before interest, tax and depreciation) of at least Rs 80 crore coupled with an interest cover of 5. However, the market capitalisation is less than Rs 400 crore. And if there is any earnings increase then watch out.

A message for the CMD: please paste the FY07 results on your website and when columnists send email and faxes, please do reply even if you do not want to be interviewed.

PG Foils: Over the last year, PG Foils has escaped market attention for two important reasons: the provision of a huge Rs 3.50 crore for Keyman's Insurance on account of tax management resulted in a decline in profit from Rs 1.09 crore in 2005-06 to Rs 0.58 crore in 2006-07 (you'd be amazed about how many investors and analysts dump a company without reading between the lines); the company embarked on a restructuring whereby a group company (engaged in the manufacture of conductor cables, alloys and properzi rods) was merged into PG during this financial year, the implications of which are blurred for many (I see no presentation to shareowners or analysts on the website!).

I have a relatively simple perspective of this spaghetti. If you factor in the fully diluted equity of the company post-warrants, you have a market capitalisation of Rs 90 crore, all told. Assuming that if I were to buy the company, this is what I would get in return:

A visible business presence in the aluminium foils and packaging industry marked by few listed companies

A gradual evolution in revenue profile to 50:50 across foils and the aluminium business in 2009-10

An installed capacity of 5000 tonne a year of foil packaging which is being expanded to 10,000 tonne a year by late 2008; an installed capacity of 25,000 tonne a year for the aluminium business

A post-tax bottom line of Rs 12 crore for 2007-08 (it reported Rs 3.6 crore for the first half)

Limited downside for a company in a sector popularised by EssDee Aluminium. And when it act gets going, then you can never tell.

Visa Steel: I got tuned into Visa through the back door. When Adhunik was Rs 30, Visa was around Rs 20. Adhunik is now Rs 180, Visa is Rs 50.

That's still a Rs 550 crore market cap for a business model that is yet to take off but consider this if you have the time (not to read, but invest):

Value chain extends from coke ovens to direct reduced iron (DRI) to ferro chrome to power to stainless steel rolling mill

Attractive metallics positioning in a world slanting towards commodities; combination of a little of Tata Sponge, Gujarat NRE, Tata Metaliks and Nava Bharat Ventures

All capacities will have been hopefully commissioned by March 2008, except the rolling mill and a 25 MW power unit, which come into play in 2009-10

Projected revenue of Rs 1,000 crore for 2008-09; margins anybody's guess

There is a small gamble here. The company is yet to be awarded any iron ore mine but considering that it has committed investments of nearly Rs 2,000 crore in Orissa (and more in other businesses through other companies), there is a possibility of a mine allotment at some point rather than the state government letting the company fend for itself on external purchases.

And should that happen then....

Mudar's disclosure: He owns stock in all the companies mentioned. He has a fiduciary relationship with ANG Auto. He is off for a pilgrimage to redeem his sins (stock market greed included!), so may take a while to respond at mudar@trisyscom.com