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| M’lawd, I plead guilty to the charge that I still prospect unheard of companies and unheard of promoters manufacturing unheard of products touting unheard of numbers who often disappear – ‘laapataa!’ – when the boom goes bust. |
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| M’lawd, I plead guilty to the charge of appraising a number of companies headquartered in the cow-belt that don’t write the Queen’s English in their annual reports and then stop sending reports after they have collected their money. |
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| M’lawd, I plead guilty on all these counts and in front of all those people who are wont to look at my dubious record and say ‘Sudharta hi nahin!’. |
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| Kalpana Industries (Rs 80): M’lawd, I must confess that there is a fair case against me on this count. The charge: it’s nothing more than a low-P/E stock (P/E of 6 based on annualised first quarter results), so big deal. |
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| My defence: net profit more than doubled in Q1 FY08 compared to the corresponding quarter and this trend is likely to continue. |
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| The charge: low spread business, EBITDA (earnings before interest, tax and depreciation) margin no higher than 7 per cent. My defence: Sharply rising volumes (86 per cent in Q1 over previous corresponding quarter) likely to sustain; margins steady in a volatile raw material environment. |
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| The charge: relatively low profile plastic compound products. My defence: Used critically in transmission power cables to counter hooking and enhance quality; robust sectoral growth foreseen. The charge: untried Kolkata management. |
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| My defence: Only manufacturer of select products in India and one of only three in Asia. The charge: low interest cover of 3.67 in Q1 FY08. My defence: expansions out of accruals and debt will lead to profit surge. |
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| Modern Dairies (Rs 110): M’lawd, please give me a patient ear on this. The charge: it’s a doodh ka dhanda anyway and so what’s left to be discovered? |
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| The defence: M’lawd, it’s not a milk business as much as it is a value-added milk products (nutritional ingredients) business; the company is engaged in city milk supply, skimmed milk powder, butter and table butter, casein and whey protein concentrates. |
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| The charge: limited upside in a business as rudimentary as milk or even milk products. |
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| The defence: the company processed 12 crore kg of milk in FY07, which is expected to rise to 25 crore kg in FY09; the proportion of nutritional ingredients (another name for value-added variants) is expected to increase from Rs 15 crore in FY07 to Rs 225 crore in the current year so that’s a different complexion from a commodity business. |
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| The charge: sharp surge in profits in Q1 FY08 – EBITDA was only a shade lower than what had been achieved in the previous full year – appears to be too good to be authentic. |
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| The defence: This reflects the twin impact of an international increase in casein prices following a gradual decline in subsidies in Europe as well as casein capacity going on stream in February 2007. The charge: Interest cover of less than 3 in Q1 FY08. |
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| The defence: the first quarter is usually the weakest; as raw material (milk) prices decline, production increases, new production lines and cogen plant (funded out of debt) go on stream, this will correct. The charge: the management does not appear credible. |
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| The defence: the customer profile does – Mother Dairy (Delhi), GlaxoSmithKline Consumer, Britannia, Hindustan Unilever, Domino’s and Pizza Hut. |
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| Rohit Ferro-Tech (Rs 39): M’lawd, historical performance is loaded against me on this but your honour, please consider the potential. |
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| The charge: High carbon ferro chrome bullishness is inevitably all eyewash; price rises have always been temporary and the relative absence of listed proxies makes investing difficult. |
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| The defence: ferro chrome is a stainless steel proxy, stainless steel is an affluence proxy and affluence (especially in Asia) is for the long-term. Besides, ferro chrome will only gradually become the flavour after performance improvements are sustained. |
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| The charge: chrome ore is inflationary; sellers may renege on supplies. The defence: increase in end product prices has been sharper and the company has a back-to-back sourcing arrangement with Orissa Mining Corporation. |
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| The charge: the equity is too large at Rs 34.46 crore. The defence: this equity supports one of the largest merchant ferro chrome capacities in India today. The charge: riding quarter on quarter interest outflow means that accruals are now working their magic. |
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| The defence: The company is expanding faster than ever out of debt and accruals; 15,000 tonne a year will be added by November 2007. The charge: the business is power-intensive in a rising power cost environment. The defence: the company’s back-to-back power arrangements in Bengal and Orissa are all priced well below Rs 2 a unit. |
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| The charge: high carbon ferro chrome prices could decline. The defence: The company’s production is expected to rise from 51,000 tonne in FY07 to 115,000 tonne in FY08 to 180,000 tonne in FY09, neutralising (at worst) the price declines. |
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| Whirlpool (Rs 38): M’lawd, I am being condemned for merely suggesting that a consumer appliance company may perhaps be investment grade. |
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| The charge: The business is highly competitive. The defence: Whirlpool is a visible global brand. The charge: The business is low margin while inputs (steel for one) have been inflationary. |
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| The defence: The company’s EBITDA margin strengthened from 5.6 per cent in Q1 FY07 to 5.74 per cent in Q1 FY08; besides, interest outflow has declined in quantum by Rs 8 lakh(!) across the Q1 of the two years even as sales increased Rs 124 crore; interest cover strengthened from 6.73 to 8.73; the company’s receivables cycle of nine days is possibly the lowest across the global Whirlpool family; the company is enriching its product mix with a view to enhance profitability further. |
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| The charge: erratic earnings profile. The defence: The income profile is largely influenced by refrigerators with marked seasonality. More than 20 per cent growth in Q1 FY08 over Q1 FY07 is confidence-enhancing. |
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| So m’lawd, I would request you to consider this detailed evidence and take a lenient view of my crime so that I may reform to pick comprehensively-researched stocks, shun the contrarian, mouth popular theories and seek refuge in P/Es in excess of 20. Your honour, I deserve a chance! |
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| Mudar responds with speed at
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Disclosure: owns stock in Kalpana Industries and Rohit Ferro-Tech. |
