Noida Toll Bridge - A few (disturbing) developments

Noida Toll Bridge has been a favourite of a lot of value oriented investors for a variety of reasons. Those who are not acquainted with the company may please go through this very very detailed report on the company. Specially, as seen in the recently quarterly results, since it has become a net-debt-free company, a lot of people are sitting up and taking notice. I will not dwell upon the troubled past of the company. The company has excellent cashflows and debt is all set to be repaid over the next couple of years. The expectation that good amount of dividend payout will happen from next year onward makes this stock very interesting indeed.

However, a couple of quarters ago, this note in the quarterly result caught my attention.

Click to enlarge

It was quite odd that the Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed the details of the same.

Then came the news about 10 odd days ago that the company had hiked the toll rates for the DND flyover. This was completely legal and within the terms of the agreement that the company had with the Government. However, this decision did not go down well with the masses. (Yes, the same thing has happened before too.) There were mass scale agitations (news article) against the company by the Federation of Noida Residents Welfare Association. Other bodies have joined in the agitation too. They have also filed a PIL against the company. Broadly they think that the original MOU (agreement) which the company had with the Government itself is unfair and needs to be scrapped!!! They have "also written to the UP Chief Minister to review the MOU and take back the DND Flyover and make it free" !!!

So can the Government do this? Apparently, yes, its very much possible!! The Government can review and modify terms of an existing project like this 'in public interest'. Please go through this article in which the authors have stated that this is a common practice internationally and they have given examples of the same being done too! (To be fair, I have not come across anything like this being done in India so far.)

In the meantime, the company has succumbed to the public pressure and has rolled back the hike in toll rates.

How does this affect the investors in Noida Toll Bridge? The shareholders have waited for an awfully long time to get any sort of returns on their investment. The report that I posted in the beginning talks about the really hard time that the company went through in the initial phases. Now that good times could start for the company and its shareholders, these new developments have popped in. Few things that could happen..

• There could be massive hue and cry about the 'unjust' and 'unfair' levy of toll on the DND Flyover with demands that the toll be scrapped. The Government could indeed play its 'in public interest' card and modify the MOU or scrap it completely. The company could then go to court, etc etc. (I think chance of this happening is remote)
• Also, the company has rights to develop a large parcel of land near the flyover, which could be objected to for a variety of reasons by a variety of parties! :-) (I think chance of this happening is high)
• Or of course, nothing of the above might happen. However, given the massive publicity and media coverage given to this, the company will find it extremely difficult, if not impossible to raise toll rates in future. (I think the chance of this happening is very high)
• Of course, the Government might do some minor modifications to the MOU to appease the parties involved and then it could be life as usual for the company. (I think the chance of this happening is fairly high).

The shareholders today do face a terminal risk to their investment in the company. Even though one may argue that the possibility of this happening is remote and probability is small, the risk is such that if it materialises, the entire company and its business model will be finished. Low probability, super high risk event!! I am not at all saying that the company is a surely bad investment (whether it is good or bad is every individual investors' decision), but anyone making investment in the company's shares should keep this risk in mind for sure. The stock is surely 'cheap' and its DCF looks great in an excel sheet, but then these out-of-excel risks are also very material to note and consider in the investment decision making process.

Let us all hope for a proper and fair resolution to this whole Do Not Disturb Flyover issue!

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

Disa India Ltd - Update

Disa India Ltd has come out with the following announcement yesterday..

DISA Holding A/S (the "Seller") has submitted to BSE a Notice of Offer for Sale an aggregate of upto 173,483 equity shares of face value of Rs. 10/- each of Disa India Ltd. (the "Company and such equity shares referred to as "Sale Shares") aggregating to 11.487% of the total paid up share capital of the Company as on November 15, 2012 by Promoter through a sale on the separate window provided by the BSE Ltd for this purpose.

The Sale shall take place at the separate window of the BSE Ltd and shall commence on November 20, 2012 at 9.15 a.m. and shall close the same day at 3.30 p.m. Indian Standard Time ("Sale Date").


So it seems like delisting is off. Monday should be 'interesting' as far as the stock price is concerned! :-) This is one more nail in the coffin for the 'delisting theme' in the Indian markets.

What is more interesting (and coincidental) is a conversation I had with my good friend Niren over a cup of our daily chai. It was a huge coincidence that we discussed Disa yesterday afternoon and this announcement came in the evening. (All unparliamentary words have been edited from the conversation! :-) )

Niren: So what do you think about the business at present? Clearly there is a slowdown.
Me: O yes, no question about it. Overall, new capex is happening slow or is being differed. The situation is not very great at present as is visible from the last 3 quarters results. So even though the potential is quite huge, conversion of the same in terms of numbers is not happening at present.
Niren: So do you think its cheap at present? Would you buy?
Me: O no not at all. I dont think its cheap at present to buy. But its not expensive enough for me to sell too!
Niren: And what about the delisting angle?
Me: Logically, I think they would delist. They have transferred the disputed shares in quite a hurry, maybe to delist before the deadline. Also, the parent is a private equity group. For them, an unlisted company would be much more easier to sell, whenever they decide to exit.
Niren: But this is not a very big part of the overall group worldwide. Would the parent care enough to delist?
Me: Ya, looking at their actions and thinking from their point of view, I think it makes sense for them to delist.
Niren: Hmmm...

HAHAHAHAHAHAHA!!! I am sure Niren is laughing too. We had this discussion and their announcement came in a couple of hours after that.

On a serious note, lessons learnt:

• We are not as smart as we think! Logic, mindmaps, 'thinking from their point of view' etc etc. will not always work :-) Market always does stuff to remind us of this fact and keep up humble. 
• More importantly, this further reinforces my belief to always always always look at the valuations. In Disa, if the business wasnt good and valuations were too irrational, I would have totally panicked after this announcement came. 
• Special situations players should take this as a big warning regarding so called delisting stories which are quoting at extremely irrational valuations. If valuations do not make much sense, then its not worth the risk hanging on, hoping for delisting.
• All decisions should be taken on the basis of the underlying business and its valuations alone, without getting distracted by events and news. This helps maintain rationality in decision making.

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours! 

CMI FPE Ltd. - Interesting, but still work-in-progress..

Wish all of you a very happy and peaceful Diwali..

Well, I often take up the following exercise in my class. You may find it interesting too..

Say there are 2 companies A Ltd and B Ltd. Both are textile companies of the exact same size, having same margin, same products, financials and similar quality of management.

Now say that A Ltd has just bought a new machine, which increases their productivity and thereby, their margins by 5%.

Given a choice, which company's shares will you buy?

Usually, people say A Ltd, which might be your answer too. What if I tell you that there are 3 choices. (No, 50-50 in A and B Ltd is not the third choice).

Well, an interesting answer (I wont call it the right answer) is; You should buy neither A Ltd nor B Ltd shares. Given a choice, you should buy the shares of the company which manufactures those machines!!!

The funda is very simple. What stops B Ltd from purchasing the same machine tomorrow? When their margins increase too, they might start a price war to gain market share. In the process, none of the textile companies will benefit. Only 2 parties will benefit; the end consumer and the machinery manufacturer!
When any sector goes through a boom phase, if one can go up the chain and identify the capital equipment manufacturer, that can become a better investment than the players in that sector! Well, if you would have identified this in the textile sector, in the context of the TUF scheme, you would have invested in Lakshmi Machine Works and your investment would have been up more than 10 times in about 10 years. Not bad!

Without drifting further, I should come straight to the topic of the post - CMI FPE Ltd. As mentioned in the title, it is still WIP for me. I think I need to do a lot more study on the company.

Background

CMI FPE was earlier known as Flat Products Equipment India Ltd and was set up by Late Dr. T.R.Mehta, who was basically a technocrat. He sold the company to the Belgian group CMI in 2008 since he did not have a successor to run the company. CMI also bought a Pvt Ltd company of the promoter, which is now named as CMI Industry Automation Pvt Ltd. CMI currently holds 75% stake in CMI FPE and 100% stake in CMI Industry Automation.
The company is basically a provider of capital equipment required by the steel sector. The company manufactures products like Cold Rolling Mill Complexes, Galvanising Lines, etc. The group is one of the largest and the lowest cost manufacturers of this equipment in the world.
Its but obvious that the fortunes of the company are pegged to the fortunes of the steel sector, which is not exactly going through a rosy period right now. But after all, steel is a cyclical sector and when it turns around, CMI FPE could benefit bigtime, like in the example above.

Basic Financials
Market Cap: Rs.330 cr (CMP Rs.670) (One may note that in FY11, the company recorded sales of Rs.437 cr and PAT of Rs.47 cr. There was Rs.25 cr other income)
By and large debt free. Works on customer advances. PE ratio etc would look ridiculously high, since the last few quarters have been quite bad. Dividend payout at 20ish % has been ok.
Excellent cashflow generation till FY11. FY12 has been bad for the company on all parameters.

Positives

1. The company works in a very niche sector, with best-in-class technology having huge entry barriers. 
2. The company is supported by a very strong parent, having global presence. 
3. From what I could find out, CMI FPE is now the only manufacturing outfit of the entire group globally in this business line. Outsourcing opportunities could be huge.
4. Slowly, the company is also expanding into new products like PLTCM and providing ancillary services to its clients.
5. The company has a strong order book position. (estimated to be more than Rs.800 cr)
6. The cashflows are strong, since the company works on advances from customers. 
7. I really liked the management's approach. Currently, the company is going through a tough time. During this period, instead of taking a step back, the management has chosen to modernise and expand the company's facilities. Please go through this and this very carefully. Basically, the management has chosen to bear short term pain and keep themselves ready to take advantage of the time when the cycle turns. Also, expanding capacity during a slowdown is usually cheaper. Such contrarian thinking is something which I honestly like.

Negatives

1. Of course, the biggest negative currently is that their customer sector is going through a tough time. Capex is being differed all over the world by steel companies. Consequently, inspite of having decent order book, execution of the same is being differed by customers of CMI. The pain is very much visible in the recent quarter numbers. (Actually this is why I started looking at it in the first place.)
2. I am unable to get a proper hang of the steel cycle. So, will the wait for the cycle to turn be a short one or a super long one? Thats something I do not know.
3. If one looks on the traditional 'value' parameters such as PE, dividend yield etc, this stock will look insanely expensive and wont appeal to many. But I think just looking at the company in number terms is not right. Business and products is what is also important.
4. CMI FPE has doubled its capacity, even though its existing capacity may not be fully utilised. This will surely lead to increase in the overall fixed cost of the company. As a result, till business conditions improve, the results of the company will look even worse.
5. Things are a bit opaque on levy of royalty/technical fees etc by the parent on the Indian company. I am not still clear on that front.
6. There has been recent announcement that the parent would be merging its own 100% subsidiary into the listed company. The details of the merger and the valuation etc has not yet been announced. But it could lead to a corporate governance issue. I am sure everyone remembers the Akzo Nobel incident. Corporate governance issue = derating and further drop in stock price. Howeverrrr, there is one more angle of looking at this event. Hint: Current promoter holding is 75%. The merger would result into the promoter holding going beyond 75%. An MNC subsidiary which could have 75% plus promoter holding, where stock price has been massively hit due to unfavourable business cycle..hmmm.. I will not say more because the D-word is a taboo currently!! :-)

So all-in-all, I find this to be a very interesting case worth studying in-depth. Primary research and things such as talking with industry people, getting multiple views and angles is very important when needs to get out of the excel sheet and understand the business properly. As I said earlier, a lot more work needs to be done on this..

Cheers and happy investing!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!