SKF India : Bad Results, Hidden Opportunity?

Results are coming in, and as expected, they are not brilliant.

SKF India, the bearings major posted lackluster results, with net profit dropping from 37.7 crores to 14.5 crores (QoQ Unaudited). With the auto industry in a slow down, the auto ancillaries are also slowing down. SKF has a lot of clients in the auto industry, and slow down is jutting out in the form of lower sales that went down from 394 crores to 317.5 crores (March Q0Q unaudited).

As far as the yearly results are concerned,

• Net Sales for the year 2008 rose to Rs. 16202 Million showing increase of 3.3% over the corresponding period of previous year.

• The Profit after Tax for the year 2008 amounted to Rs. 1277 Million as compared to Rs 1607 million in the corresponding period of last year.

• Earnings per share at the end of the year is 24.2 as compared to 30.5 in corresponding period of last year

The MD said this:

"In today's challenging environment we have taken measures to remain financially robust, focusing on efficiency and finding innovative ways to remain lean in order to keep our cost down. Our focus is on value added services and being recognized by our customers as a 'solutions provider'. We believe that the economic situation will remain uncertain for some time and our focus is clearly on creating close customer partnerships to offset some of these adverse conditions."

For SKF, the year was marked by high volatility in input costs, interest and currency exchange rates and in customer demand, more particularly during the latter part of the year leading to pressure on margins and working capital. Demand from the Automotive Sector, particularly commercial vehicles continued to remain weak.

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So what would i, as an investor think? How would i look at this? I would look at this as an opportunity. When companies perform well, everyone is buying the stock. But during the rough weather, very less buy. And these people profit from their decisions later, when the company starts performing better when the market conditions improve. My recommendation is to wait till the price falls to around Rs. 120 level, and then enter slowly. If you think the price is not going to fall, and you are one of the long term investors (and you happen to read this!), you can enter cautiously now, since a fall is anticipated anytime.

Solvay Pharma India Ltd: Making your investment safe

One good thing about the stock exchanges is they have all kinds of scrips: starting from the Ispats to the Solvays.

Solvay Pharma India Ltd is a subsidiary of a dutch pharmaceutical - chemical giant Solvay. Solvay bought out most of Duphar's products to enter into the Indian market, and has now a strong presence in the pharma industry. Some of its most famous products are Influvac (the influenza vaccine), Duphalac (lactulose) and Duvadilan (for pregnant women).

In these troubled times, one has to find safer avenues for capital. In the equity markets, shares of Pharma / FMCG companies are always preferable since they are, well, traditionally "recession proof". But when you are making a safe investment, you have to choose wisely. An investment in Ranbaxy would not be safe, since it has way too much attention and is a trader's favorite. Agreed, that Ranbaxy shares have a great upside, but then, so do Unitech's.

Coming back to Solvay, have a look at the following figures: From a 68.4 crore company in 2001, it has grown steadily into a 200 crore company in 2008, on income basis. As like most of the MNC pharma companies, it has 0 debt,. What i am betting upon now is some organic growth by the company. Since its inception, Solvay has grown inorganically - buying brands from Duphar (after separating from it) as a starter. As on Dec 07, it had reserves of 66 crores, which grew to 85 crores by Dec 08. Its PAT rose from 92 crores to 99 crores, and it also pays reasonable dividend. (Rs. 17.5 per share of cmp as on 17 april 2009 of Rs. 600)

The bet is on organic growth, and more involvement of the parent company for a larger market share in India. The negatives are pretty much none - the scrip may get delisted (that is unlikely), like most MNC companies after the shares have run their course, but the possibility is remote. Now, i am simply opinionating, but i do think that Solvay Pharma India Ltd is that boat that can steer your capital out of safety in this financial maelstrom.

Voltas

Voltas Ltd is another successful Tata company. And another investment opportunity. The stock now trades at around Rs. 50-55, with FV of Re.1. I recommend investors to enter into an SIP with this scrip, if they are cautious about the market fluctuations, or jump into it at one go if they are the orthodox type of long term investors.


What is spectacular about this company is its diversification, and what it does not share with other diversified companies of similar size is the debt position. With near zero debt, and good margins, Voltas’ profit is seen to grow regularly. Its core business revolves around Electro-mechanical projects & services, Engineering products and services, and Cooling products for comfort and commercial use. There is also the Textile Machinery Division, another profit making vertical. It gave a dividend of Rs. 1.35 /share last year, which may not decrease this year. As on the last year end, Voltas had orders worth Rs 8 billion, and with newer infrastructure projects coming in, like airports, hospitals – just to name a few, domestically, the air conditioning industry is estimated to grow by 25%. A detailed analysis is found in a wonderful PDF I found at the Voltas site. It reaffirms faith in this Tata firm. Another analysis by KR Choksey can be found here.

Excerpts from that report:
"We met the management of Voltas Ltd to understand the company’s strategy in the midst of the global economic slowdown. Key takeaways of the meeting are as follows:

Huge orders from the international market to provide strong revenue visibility
The total order backlog of the company stands at Rs 5,334 crore at the end of Q3FY09. In domestic business the order book stands at Rs 1,085 crore, a growth of 35% y-o-y and in international projects the order book stands at Rs 4,200 crore, a growth of 58% y-o-y. The domestic projects have timeline of 9-12 months and international projects have timeline of 24-30 months thereby providing good revenue visibility. The company has not witnessed any cancellation of orders as most of the projects are government or semi-government funded.

Diversified business model
Voltas has primarily three business lines where Electro Mechanical Projects & Service (EMPS) is the biggest business segment contributing 54% to the topline in FY08. In this segment Voltas serves both international as well as domestic clients. Going forward we expect the international projects to contribute ~60% to the segment revenue (45% in FY08). The company is now a fully integrated player from a mere HVAC (Heating, Ventilation and Air-conditioning) to MEP player in domestic market on acquiring Rohini Electrical (Mumbai based turnkey electrical and instrumentation projects contractor). Thus being well diversified would ensure revenue growth inspite of economic slowdown.

Competitive Advantage over others
Civil work constitutes 65% of the total construction cost of an In-built environment and 30-35% is MEP works. Voltas is a contractor of choice in MEP (Mechanical which includes HVAC, Electrical & Public health which includes plumbing) in the international market. Thus being a well established player and having strong track record of projects, Voltas has an edge over other players in domestic and international markets.
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Oh, and not to mention the recent announcement: a new alliance with M/s Thies of Germany, to offer enhanced value to customers, and support the growth of Indian textiles to the extent it matches its potential, by selling & servicing Thies products in India. Which means, it has to earn here, not lose any money! This is one company whose results I’ll be watching with confidence. Happy earnings!

Suzlon Energy Ltd

Suzlon Energy is one of the stocks that has really been mauled by the bears. The CMP (as on Thursday, April 2, 2009) of Rs. 50.75 (fv of Rs 2)is still attractive given the IPO price of the share of Rs. 510 (fv Rs 10). That's the price side.

Now the good and the bad news.

The bad, first. Net profit has consistently deteriorated this year (88.0 cr,16.9 cr,-390.9 cr) owing to the mark to market losses in forex forward/option contracts. The debt, as usual, and the perks that come with it. Suzlon had taken loans of around Rs. 7000 crores to fund the stake buy in REPower. Now that debt, would need refinancing as the prospects of that debt being repaid by the reserves look bleak, as with every other company. Refinancing is difficult in these trying times. There has also been a lot of negative speculation surrounding this company, and the company has also clarified a huge part of it. The clarification is available here. Suzlon had raised $300 million via the FCCB route. The conversion price stood at Rs. 1800 per share. These bonds mature in 2012. There is also a possibilty of a buy back of these bonds, which would be trading at discounts at the moment. What could also happen is the conversion of these bonds into shares, resulting into dilution of the share capital. The company, in its results notes, has stated that:

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The Company has treated the Zero Coupon Convertible Bonds as monetary liability and accordingly restated the liability based on the exchange rate prevailing as at the end of the respective quarter. The amount of restatement for the quarter and nine months ended December 31, 2008 aggregated Rs.91.75 crores and Rs.434.50 crores respectively.

On June 11, 2007 and October 10, 2007, the Company made an issue of USD 300 Million (Rs.1,223.70 crores) and USD 200 Million (Rs.786.20 crores) Zero Coupon Convertible Bonds due 2012, respectively convertible into equity shares. The initial conversion price is fixed at Rs 359.68 per share and Rs.371.55 per share respectively (Face Value of Rs.2 per share) and the same is subject to adjustment in certain circumstances.
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Suzlon was going to go ahead with its $500 mil ADR offering, but there is speculation rife that the move is on hold.

The good news is that it enjoys near monopoly in India, and the prospects of sustainable growth in the renewable energy sector are beautiful. Nations are looking at other non polluting sources of energy amidst cries for global warming, and wind energy presents a nice alternative. The strategic alliances of Suzlon are in place in many markets- NZ/Aus, Europe, United States etc. The company has recently entered the Sri Lankan market, and has a burgeoning order book. As on Mar 08, the company had declared reserves of Rs. 7791.7 crores. I am waiting for its results for the year that has just passed...

...with fingers crossed...