Saturday, July 30, 2011

Sugar Sector and Mind-maps!!!

Hello and happy AGM season to all!
Sometimes, it so happens that while taking an investment decision, one's thought process becomes more important than fundamental analysis, ratio analysis, etc etc.. (Most of the times, its because one is unable/incapable to do fundamental analysis, etc!!!)

For example, consider me and the sugar sector!! We just don't get along! I hate the sugar sector from the bottom of my bottom! I just cannot make any estimation or take a view on the future of the sector. Here's why..
- The price of raw material (sugarcane) is controlled by the Government.
- The price of the finished product (some of it) is controlled by the Government.
- Imports/exports can also be controlled by the Government.
- Government people aren't very rational lotsa times. One cannot even guess what they can do!!
- Soooo, what can happen to the sugar sector in between all this mess is anybody's guess.

However, it so happens that if one plays a commodity cycle (like sugar) right, the returns can be HUGE. Soooo now, we have a situation, where there could be an attractive opportunity, but we have absolutely no idea how to analyse it fundamentally, etc.

So here is where something called as mind-maps come in. When you want to arrive at a decision using a very structured thought process, mind-maps come in very handy. They are a flowchart kinda thing, where a logical flow of thoughts helps you arrive at a decision.

So I scribbled up a mind-map relating to something in the sugar sector, coz I had nothing better to do at the time! :-D Here it is...

Please click to enlarge

Some more points regarding the same:

  • One can totally ignore the sector as such.. No harm in doing that at all. There is no compulsion. Huge number of other (but not comparable) opportunities are available out there.
  • If one opts to go this way, one would be holding on to the stock for 2-3 years without having the faintest idea why!!! So it can get very very uncomfortable. 
  • If one wants to take an exposure to the sector, one may also want to do a basket approach. Buy Balrampur, buy Renuka and also buy the worst company in the sector! 
Now for some idea killers (a.k.a. why all of the above sucks!)
  • Extended sugar cycle depression: You could have a situation where you are stuck in the position for a long looooong time without any decent returns. 
  • Capital allocation: How much of your portfolio can one allocate to such a kind of position? Basically, you are taking a position without much 'actual' thought, right?
  • Probable opportunity losses: Once capital gets allocated there, one may have to suffer the heartburn of suffering opportunity losses, at least for some time.
  • Irrational decision making down the line: If one cannot control emotions here, there can be some irrational decision making one can get into. It wont be comfortable holding positions like this...
  • When to sell? While taking the position, one has no idea about the 'value' of the company. So one will have no idea at what price it becomes overvalued, at what price to sell, etc. So it could cause real confusion later..
Anyways, it could very well be the case that you do not agree with me at all. And that's absolutely ok. We are different people, we will have different opinions! Investing is extremely relative. But even if you don't agree with this way of getting into the sugar sector, at least do give a thought to the concept of 'mind-maps'. Its a great way of taking decisions.

Cheers and happy investing!!

Friday, July 15, 2011

Kesar Terminals - whats in store-age?!!

I had written about this about Kesar Terminals (KTIL) here and here. Lets have a small follow-up on the same.

The business:

The business of KTIL is a very simple one. You erect liquid storage tanks at a port, which can store a variety of liquids like chemicals and oils. You rent them out. Simple! Anyone importing or sometimes exporting liquids will need a place to store them at/very near to the port of import/export. KTIL provides this service to such importers/exporters.

  • Currently, KTIL has 64 such tanks with a capacity of 1.27 lakh kiloliters right in front of the jetties at Kandla port.
  • As part of its expansion plan, KTIL has taken possession of 10 acres of land in Kakinada Port in AP, where it plans to put up dry and liquid cargo handling facilities. Also, KTIL has purchased 16 acres of land at Pipavav port in Gujarat where it plans to put up liquid storage facilities and a container freight station.
  • Capex for the same will be Rs.31 cr @ Pipavav for a 36000 TEU CFS capacity and Rs.27 cr @ Kandla for 40000 kiloliters liquid storage capacity.

Currently, the market is valuing this company at an EV of about Rs.48 cr. Now, the business of the company itself is an annuity business. Do a one-time upfront capex and receive rent on it every year. Rentals of course fluctuate as per macro scenario, but KTIL has long term contracts for about 70% of its capacity, meaning that 70% of its tanks will probably never lie 'un-rented'.
Because of the annuity nature of the business, one can attempt a DCF based valuation of the company. Please note that I am not a big fan of DCF. Imho, DCF can be (rather, should be) done only for a limited types of businesses. So, the valuation is merely for reference purpose and I do not claim in my wildest dreams that it is precise and correct! Certain assumptions to the DCF like growth rate of free cash, discounting rate, etc are relative and everybody's assumptions will surely be different, resulting in different results. (That's what makes DCF an analyst's best friend!)

So, after assuming certain things, we arrive at an intrinsic value of Rs.119 per share, against current market price of Rs.83 per share.
So, should one rush to buy the shares, based on this? HELL NO..and heres why..

  • Our calculation is entirely based on past and present situation. However, we have to take into account that the company is going for a massive capex over the next 2 year period. Capex of Rs.58 cr (much more than even the current market cap of the company!)..
  • For this, the company will have to raise a large amount of debt and possibly, dilute equity too. (In my opinion, raising equity at decent valuations must have been the primary reason for the demerger).
  • Due to this, the current free cash, dividend and the more-or-less pretty picture may not last for a period of time in the near future.

So what would I do?

Wait!! To buy more, I would wait for the entire picture on financing to get clearer. How much dilution, how much debt and from whom? (Public deposits/term loans/FCCBs or what?) 

On a different (yet very very important) note, do check THIS out. And consider this...
  • CRL Terminals (the company which was sold) is a similar business to KTIL, having capacity of 2.6 lakh kiloliters. Other financial details of the company are unknown.
  • KTIL has capcity of 1.27 lakh kiloliters plus land at 2 places.
  • CRL was sold for Rs.278 cr. KTIL's market cap is Rs.42 cr, EV is Rs.48 cr.
  • Sooo, a business, just like KTIL, which was just 2 times of KTIL's size, was sold at about 6 times KTIL's EV. This was just FYI. ;-)
Cheers and happy investing!!

P.S.: Me and my good friend Ninad have exactly opposite views on investing in KTIL.. So, with his due permission, this post is dedicated to him! :-D