And as the budget fever subsides, Dalal Street goes back to normal - or at least to a slightly less fevered state. But the Chidambaram bug has bitten and everyone is looking for the latest hot stock. Suddenly people are asking for tips - but no sooner you use the words "long-term", they tune out. One fears that the lessons of the past may soon be forgotten, especially as all the pundits predict the start of the next bull run, and wild estimates for the Sensex are doing the rounds.
Very often, the steady reliable growth stock will outperform the flashy high growth stock, which has a greater chance of faltering, or attracting competition, or diluting equity. A company that grows at 40% p.a. will need to double capacity every two years, while a 15% growth will require capacity to double in 5 years. Who do you think is more likely to approach the public with a begging bowl? Yet, sales growth and size often blind us to the costs of such growth.
Among the many small cap companies that I've looked at, Siro Plast is one that stands out. This company is promoted by the Mahindras along with SICOM. Though some of you may have your pet grouses against the Mahindra group, the fact remains that in a corrupt world, this group has kept its hands unsullied. Shareholders have been treated fairly, and have generally earned decent returns. The promoter's reputation minimises the chances of rude shocks, which can be particularly painful for very small cap stocks.
Siro Plast makes fibre reinforced plastic (FRP) compounds and components. FRP is extensively used in other countries, since it provides unique strength, durability, fire-retardance, and insulation while weighing very little. However, in India, the industry is still at an embryonic stage. Corporate interest has been minimal, since product and market development costs are high relative to the size of the market. Besides the technology barrier has kept out the unorganised sector to a great extent. Barring boats, airport chairs, jeep bodies and a few other applications, FRP composites have very low penetration levels.
In 1989, the Mahindras (via Roplas), and SICOM set up Siro Plast to make composite compounds and components. Two types of materials are made - sheet moulding compound (SMC) and dough moulding compound (DMC). While SMC contains long glass fibres in a sheet of resin, suitable for products requiring high mechanical strength, DMC with short pieces of fibre is used for small intricate shapes. These compounds are made into components using compression moulding.
The early years were a nightmare, as Siro Plast had to spend considerable time and money in creating market awareness, and losses accumulated till FY93. However, in FY1994 the company turned around. Today the company's products are reasonably well established and attract clients like Telco, M&M, Crompton Greaves, Ashok Leyland, etc.
DMC is mainly sold to switchgear manufacturers who use the material for external casings, while SMC is sold to component manufacturers for the electrical and railway sectors. Siro Plast also manufactures finished components, mainly for the automotive sector. Today, around 50% of their sales are to the auto sector, with electrical and railways taking up 20% each, while the remaining is consumed by the defense and telecom segments.
Now that these composites have found some acceptance in the market, the going should get easier. Growth for Siro Plast will come not only from increased volumes of existing products, but also through substitution of alternative materials. The share of components has increased to 40% of sales in FY96, up from 18% in FY93, and will go up to 60% in FY98, which helps in improving margins.
Currently, the DMC capacity is operating at more than 100% utilisation and is being doubled. A new 1000 T press for components will be ready by mid 1998. Siro Plast today supplies assembled engine hoods to Telco, Pune. They plan to replicate this at Telco, Lucknow, where they will invest in a near on-line assembly unit in 1997-98. All this should cost less than Rs. 2.5 crores and will be funded internally.
The balance sheet of the company is a revelation. The book value which was (negative) --Rs.3 in March 1993 has crossed par value, and should be Rs. 14 by March 1997. From being unable to pay interest some years back, in FY96 the interest cover was 6 times, and should be 9 times for FY97. All the term loans should be repaid in full by mid 1997. And what is more, the bulk of the remaining debt is the interest free sales tax deferred loan, making Siro Plast a virtually debt free company. The sales tax principal amount only needs to be repaid after 2002. The company will end FY97 with surplus cash of about Rs. 3 crores.
The other major good news is on the raw material front. Raw materials, mainly polymers and glass fibre, have declined from 80% of sales to under 65% in the current year. What is interesting is that SPL effected a turnaround despite a huge jump in glass fibre prices between 1993 and 1996. During 1996, prices of glass fibre tumbled and are today 30% lower than in the previous year. The recent reduction in customs duty (52% to 42%) will help further. Till now the glass fibre market has been dominated by FGP Ltd.. New entrants Binani and Owens Corning will change the supply situation significantly. In fact, the joint venture partner for the Owens Corning project is the Mahindra group itself, which will provide significant synergy for both companies.
The company which expects to grow at 20-25% p.a., is valued at less than 3.5 times FY97e earnings, at its current price of Rs. 20. EPS growth in the current year will be around 27% despite a provision for MAT, and a restructuring of its railway related business. Both the RONW and ROCE are in excess of 30%. For a near debt free company backed by reputed promoters, and a healthy client list, this valuation appears far too low. However, given the low market capitalisation of Rs. 8.8 crores, this scrip may take time to catch fancy, but the wait could be worth the while of long term value investors.
Very often, the steady reliable growth stock will outperform the flashy high growth stock, which has a greater chance of faltering, or attracting competition, or diluting equity. A company that grows at 40% p.a. will need to double capacity every two years, while a 15% growth will require capacity to double in 5 years. Who do you think is more likely to approach the public with a begging bowl? Yet, sales growth and size often blind us to the costs of such growth.
Among the many small cap companies that I've looked at, Siro Plast is one that stands out. This company is promoted by the Mahindras along with SICOM. Though some of you may have your pet grouses against the Mahindra group, the fact remains that in a corrupt world, this group has kept its hands unsullied. Shareholders have been treated fairly, and have generally earned decent returns. The promoter's reputation minimises the chances of rude shocks, which can be particularly painful for very small cap stocks.
Siro Plast makes fibre reinforced plastic (FRP) compounds and components. FRP is extensively used in other countries, since it provides unique strength, durability, fire-retardance, and insulation while weighing very little. However, in India, the industry is still at an embryonic stage. Corporate interest has been minimal, since product and market development costs are high relative to the size of the market. Besides the technology barrier has kept out the unorganised sector to a great extent. Barring boats, airport chairs, jeep bodies and a few other applications, FRP composites have very low penetration levels.
In 1989, the Mahindras (via Roplas), and SICOM set up Siro Plast to make composite compounds and components. Two types of materials are made - sheet moulding compound (SMC) and dough moulding compound (DMC). While SMC contains long glass fibres in a sheet of resin, suitable for products requiring high mechanical strength, DMC with short pieces of fibre is used for small intricate shapes. These compounds are made into components using compression moulding.
The early years were a nightmare, as Siro Plast had to spend considerable time and money in creating market awareness, and losses accumulated till FY93. However, in FY1994 the company turned around. Today the company's products are reasonably well established and attract clients like Telco, M&M, Crompton Greaves, Ashok Leyland, etc.
DMC is mainly sold to switchgear manufacturers who use the material for external casings, while SMC is sold to component manufacturers for the electrical and railway sectors. Siro Plast also manufactures finished components, mainly for the automotive sector. Today, around 50% of their sales are to the auto sector, with electrical and railways taking up 20% each, while the remaining is consumed by the defense and telecom segments.
Now that these composites have found some acceptance in the market, the going should get easier. Growth for Siro Plast will come not only from increased volumes of existing products, but also through substitution of alternative materials. The share of components has increased to 40% of sales in FY96, up from 18% in FY93, and will go up to 60% in FY98, which helps in improving margins.
Currently, the DMC capacity is operating at more than 100% utilisation and is being doubled. A new 1000 T press for components will be ready by mid 1998. Siro Plast today supplies assembled engine hoods to Telco, Pune. They plan to replicate this at Telco, Lucknow, where they will invest in a near on-line assembly unit in 1997-98. All this should cost less than Rs. 2.5 crores and will be funded internally.
The balance sheet of the company is a revelation. The book value which was (negative) --Rs.3 in March 1993 has crossed par value, and should be Rs. 14 by March 1997. From being unable to pay interest some years back, in FY96 the interest cover was 6 times, and should be 9 times for FY97. All the term loans should be repaid in full by mid 1997. And what is more, the bulk of the remaining debt is the interest free sales tax deferred loan, making Siro Plast a virtually debt free company. The sales tax principal amount only needs to be repaid after 2002. The company will end FY97 with surplus cash of about Rs. 3 crores.
The other major good news is on the raw material front. Raw materials, mainly polymers and glass fibre, have declined from 80% of sales to under 65% in the current year. What is interesting is that SPL effected a turnaround despite a huge jump in glass fibre prices between 1993 and 1996. During 1996, prices of glass fibre tumbled and are today 30% lower than in the previous year. The recent reduction in customs duty (52% to 42%) will help further. Till now the glass fibre market has been dominated by FGP Ltd.. New entrants Binani and Owens Corning will change the supply situation significantly. In fact, the joint venture partner for the Owens Corning project is the Mahindra group itself, which will provide significant synergy for both companies.
The company which expects to grow at 20-25% p.a., is valued at less than 3.5 times FY97e earnings, at its current price of Rs. 20. EPS growth in the current year will be around 27% despite a provision for MAT, and a restructuring of its railway related business. Both the RONW and ROCE are in excess of 30%. For a near debt free company backed by reputed promoters, and a healthy client list, this valuation appears far too low. However, given the low market capitalisation of Rs. 8.8 crores, this scrip may take time to catch fancy, but the wait could be worth the while of long term value investors.
|
Rs. Crores |
FY91 |
FY92 |
FY93 |
FY94 |
FY95 |
FY96 |
9609h |
FY97e |
FY98e |
|
Net Sales |
1.77 |
2 |
2.68 |
4.64 |
8.32 |
12.78 |
6.50 |
15.21 |
19.01 |
|
Raw material % to net sales |
80.8% |
71.0% |
73.1% |
67.2% |
68.2% |
65.8% |
n.a. |
62.5% |
63.0% |
|
PBDIT* |
-0.34 |
0.10 |
0.03 |
0.56 |
1.30 |
2.56 |
1.19 |
3.38 |
4.14 |
|
% to net sales |
-19.2% |
5.0% |
1.1% |
12.1% |
15.6% |
20.0% |
18.3% |
22.2% |
21.8% |
|
Net Profit |
-0.99 |
-0.6 |
-0.79 |
0.06 |
0.52 |
2.05 |
1.03 |
2.61 |
3.14 |
|
Equity |
2.36 |
2.36 |
2.36 |
2.36 |
3.21A |
4.39B |
4.39 |
4.39 |
4.39 |
|
Reserves |
-1.74 |
-2.3 |
-3.08 |
-3.02 |
-2.5 |
-0.45 |
|
1.72 |
4.20 |
|
Total Debt |
3.72 |
4.42 |
5.26 |
5.27 |
5.06 |
5.14 |
|
4.09 |
3.02 |
|
RONW |
|
|
|
|
|
88.2% |
|
51.9% |
42.7% |
|
ROCE |
|
-2.3% |
-2.7% |
7.2% |
20.2% |
33.1% |
|
34.9% |
37.3% |
|
Earnings Per Share |
-4.19 |
-2.54 |
-3.35 |
0.25 |
1.62 |
4.67 |
|
5.94 |
7.16 |
* excluding other income, e - estimates, A - on conversion of debt to equity, B - 1:2 rights issue at par.