Some stocks in the market are cheap..others are CHEAP.
Aditya Birla Chemicals (ABCL) probably belongs to the latter category.
Aditya Birla Chemicals Ltd is a chemical company belonging to the Aditya Birla Group. (I think that was the least-value-adding sentence ever! :-) )
ABCL's main product is Chlor Alkalies (chlorine and caustic soda). One can have a look at their products here.
ABCL is valued by the market as follows:
One should take this factor into account while looking at the trailing valuations.
Seems cheap huh?
Well, if you had invested in this company on 26/04/2006, you would have made a total (not compounded) return of 32% in the last 4 years. Now, i am a very conservative fellow, but this kind of return would not excite even me! Dont get me wrong, I really do not care about a stock's historical price movement.. this was just to give you a perspective. :-)
Now let us look at the company's historical performance. I have tried to list down basic financials, which can give us an idea of its past performance.
Growth: ABCL has shown consistent growth over the past 5 years.
Cash-flow: ABCL generates a decent amount of cash. This has led to the entire growth being financed through internal accruals over the past years. The company has not diluted capital and has, in-fact, repaid debt consistently.
Margins: Being a commodity business, margins can fluctuate. 35% operating margins can be considered as normal. (Margins are higher than its peers like Gujarat Alkalies and Chemicals)
Valuations: Extremely low, consistently! The market has neither fancied this stock, nor given it decent valuation ever.
In fact, it can be observed that, over the years, as the company has improved its financials and performance, it has become cheaper!!!
Now I agree that a commodity-type business will never get high valuation, but should the valuation be this low?
Let us look at some typical factors which lead to a company being accorded very low valuation: (My comments are in red)
- Dishonest/inefficient management: ABCL is a Aditya Birla Group company. One can say with near certainty that the management is neither dishonest nor inefficient.
- Dubious financials: The numbers do seem to be in place. I do not believe that there is any problem with the numbers.
- Products with bleak future: This also does not seem to be the case. ABCL's products are well in demand. The company is also getting into more value-added products.
- Absence of growth: Mr.Market typically accords low valuations to businesses where growth is severely depressed. This also does not seem to be the case here.
- Extremely low margins: Businesses with very low single digit margins are accorded low valuations. This also does not seem to be the case here.
- Low dividend distribution: Yesss!! This could be one of the reasons for the low valuation. ABCL has never distributed more than 11% of its profits. In the small cap space, investors generally prefer companies paying out more dividend. However, as long as the company's return ratios remain high, i am comfortable with low dividend payout.
- Who will look at a boring commodity-chemical company?? Could this be the reason? Well, if yes, I would be very interested in investing in the company.
- ABCL's website does not have an 'investors' section: ok ok, now i am being ridiculous! :-)