Are Marico & GCPL wealth creators?

In our previous article, we showcased how two mid-sized FMCG companies, Marico and GCPL have been growing at a robust pace clocking average sales growth of 22% and 38%, respectively during the past five years. They owe their growth to the acquisition overdrive, and what is remarkable is that they are still managing to stay afloat. Both of them have recently diluted equity to fund their inorganic growth.

In this article, we test the efficacy of their brown-field "brand-wagon" expansion strategy for generating shareholder's return.

Godrej Consumer Products Limited (GCPL) made its first acquisition of 'Keyline Brands' in 2005, whereas Marico acquired its first domestic brand 'Nihar' from HUL in 2006. So let us study the most recent five-year time-frame (FY06-FY11) to find out if, and how much shareholders have benefitted. The best way to test it is to determine the returns earned by shareholders on every additional rupee invested by them. In other words, these stocks should have earned at least a rupee for every one rupee invested 'One-rupee test' to qualify as an investment candidate as per Value Investment guru, Warren Buffet.

The numbers testify that the brand acquisition strategy has enabled both Marico and GCPL in increasing shareholder's wealth. In fact, for every rupee of equity investment during the period FY06-FY11, Marico and GCPL have created market values of Rs 8.3 and Rs 4.7, respectively and have multiplied shareholder's wealth at least five fold.

Interestingly however, the table below shows that this performance pales when compared to the magnitude of wealth created in the period prior to the acquisition spree (FY02-FY06). During this period, each rupee of shareholder's funds generated phenomenal returns of Rs 43 and Rs 146 for Marico and GCPL respectively.

Marico and GCPL pass the 'One Rupee' test

	Increase in networth in Rs m (A)		Increase in Market Cap in Rs m (B)		Value created for every Re 1 invested (B/A)
(Rs m)	FY02-FY06	FY06-FY11	FY02-FY06	FY06-FY11	FY02-FY06	FY06-FY11
Marico	640	6542	27449	53942	42.9	8.3
Godrej Consumer	255	16465	37211	77261	145.9	4.7

Source: Ace Equity
A look at the trends clearly shows that shareholders reaped stellar returns on their investments during the initial organic growth phase. These spectacular returns fell considerably in the more recent inorganic growth phase, when the two companies acquired a large number of brands in the domestic and international markets.

This relative underperformance, also, reflects shareholder's concerns about the future prospects of the acquired overseas brands in a global recession.

Marico and GCPL have managed to finance their acquisitions without piling on excessive debt. However, they now need to focus on making their acquisitions successful, and on generating much higher returns on additional equity investments made by the shareholders.

Going forward, it remains to be seen, if these two companies are able to derive greater mileage from the acquired brands, and regain their original status of being high wealth creators.


source: equity master

ANIL LTD

Anil Limited, formerly Anil Products Limited, is engaged in manufacturing starches and its derivatives. The Company s products include Native Starch, Chemical Starch, Modified Starches, Dextrins, Dextrose Monohydrate Liquid Glucose, Corn Syrup and Sorbitol. It provides its products to various industries, such as textile, food and beverages, paper, pharmaceuticals and animal feeds. Anil Limited manufactures technically advanced products and operates in India & has an international network in more than 30 countries it is 73 year old company situated in area of around 40 acres at prime location is Ahemedabad. Company is also said to be having good land at Savli near Baroda, With increasing demand for Food, Pharmaceutical, Animal Health Care, Paper and Textile products, demand for specialty starches and derivatives is consistently increasing. Acceptability of company as a global player is now being established and demand is expected to grow further\ from Asian, African & European countries. With Foreign Direct Investment being allowed in the retail sector and consequent entry of\ large international retail chains, the FMCG industry will see some structural changes happening which could result in a strong growth momentum. With expected eps of around 48, RONW OF around 35 %, strong assets base, stock look attractive for buying on dips. 52 week high of stock is 349 & low of 206,. on 20th dec, most of the stock made low, while this stock was around 233 levels, thus at current valuation of 240 down side is limited in the stock, investors can keep watch to accumulate this stock

source: kukkuji rec   in smart investment

The category suitable for most investors

Among the three investment categories, general situations were the most important for Warren Buffett. He describes them in great detail in his 1961 letter:   

"Generally undervalued securities (hereinafter called ‘generals’) where we have nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself. Over the years, this has been our largest category of investment, and more money has been made here than in either of the other categories [note: specials and controls]. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.

Sometimes these work our very fast; many times they take years. It is difficult at the time of purchase to know any specific reason why they should appreciate in price. However, because of this lack of glamour or anything pending which might create immediate favorable market action, they are available at very cheap prices. A lot value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety in each transaction. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.  Over the years, our timing of purchases has been considerably better than our timing of sales. We do not go into these generals with the idea of getting the last nickel, but are usually quite content selling out at some intermediate level between our purchase price and what we regard as fair value to a private owner.

The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap does not mean it is not going to go down. During abrupt downward movements in the market, this segment may very well go down percentage-wise just as much as the Dow. Over a period of years, I believe the generals will outperform the Dow, and during sharply advancing years like 1961, this is the section of our portfolio that turns in the best results. It is, of course, also the most vulnerable in a declining market.” - Warren Buffett’s letter to partners, 1961

It may be noted that at Valuequity, we limit our research service mainly to the ‘generals’ category. While ‘specials’ and ‘controls’ are also valid investment themes, they are unsuitable for the common investor. In any case, a large chunk of the portfolio of even a highly skilled investor like Buffett also consisted of generals.

What to expect from investment in undervalued stocks

Buffett clearly outlines the features of investing in generals. They are:

• Which stocks to invest in? Seek stocks whose prices are demonstrably lower than their intrinsic value. This provides individual margin of safety. Further, moderately diversify (hence the portfolio of 20 stocks). These two factors, taken together, reduce the risk arising from an error in judgment or due to unforeseen circumstances.

• How many stocks to invest in? A concentrated portfolio. The portfolio should consist of 15 to 20 stocks. Almost 50% of the portfolio should be concentrated in about 5 main ideas.

• Why will the stocks move up? Due to normal actions of the stock market. Specific catalysts are unknown. We cannot predict why exactly the undervaluation should correct.

• How will the portfolio behave? In the short term, we can expect the portfolio to be in synch with the broad market direction (both upwards and downwards). In the longer term, we can expect to outperform the broader market.

• How long do we hold the portfolio? It is impossible to predict a time table beforehand. We must work with a minimum investment horizon of 5 years.

• When to sell? Focus more on buying than selling. Value investors tend to be better at knowing when to buy rather than when to sell. It is fine to leave some money on the table.
•  
  Investment checklist
  Here then, is a list of new additions to our investment toolkit:
     1.  Classify investments into categories based on their underlying characteristics.
     2.  Set your expectations from investments in advance. Match your expectations with the category.
     3.  Seek a margin of safety in individual stocks.
     4.  Construct a portfolio of around 20 stocks. Concentrate in about 5 of your best ideas.
     5.  Work with an investment horizon of 5 years.
     6.  Expect to outperform the broader market only in the long term.
     7.  Focus more on when to buy than when to sell.

investing-in-turbulent-times

IGL: What lies ahead?

The stock of Indraprastha Gas Ltd (IGL) has taken a beating of more than 30% in a single day on account of a directive issued by PNGRB (Petroleum and Natural Gas Regulatory Board) to the company to refund the excess network tariff and compression charges charged (referenced back to April 2008) by the company on gas sales. The regulator has cut down the Network & Compression Charges by around 63% and 59% respectively. We expect the company to challenge the decision in the Courts as it can have a significant impact on its earnings. A detailed notification is awaited from PNGRB regarding the refund for the past years.

The realization on gas sales comprises of gas costs, marketing margins and transportation tariffs of pipelines that a city gas distributor (CGD) charges. While gas costs is driven by demand supply dynamics, transportation tariff is set by regulator in a way that CGD earns a post tax return of 14% on the capital employed (RoCE). The marketing margin is decided by the CGD itself. However, recently there has been a buzz in the markets that the regulator is planning to regulate marketing margins as well.

Now, as per the regulatory Board, the company has been overcharging the customers as shown in the table.

	Charged by IGL	Approved by PNGRB	% change
Network tariff (Rs per mmbtu)	104.05	38.58	-63%
Compression charge (Rs per kg)	6.66	2.75	-59%

Source : PNGRB
The downward revision has been on account of difference in capex, volumes, maintenance and other expenditure and the time period that was submitted by IGL versus what has been considered by PNGRB.

Assuming a conservative case where the company has to follow the decision, we expect the following changes in our key estimates.

	Old estimates		New estimates
	2013E	2014E	2013E	2014E
Operating Profit Margins	23%	22%	18%	17%
Net Profit Margins	11%	11%	7%	7%
RoE	27%	26%	16%	16%
Diluted EPS (Rs per share)	25.9	30.3	14.6	16.7

Equitymaster estimates
As per the regulator, the closure to this issue could be affected only by June 2012 post some clarifications from IGL. We expect the company to approach the courts against the decision. Apart from that, there will be some upside to our revised estimates in case the regulatory Board decides to leave marketing margins untouched. In that case, the company will be able to improve realizations to some extent by compensating the loss on tariffs from the marketing margins.

Conclusion

While it is impossible to determine the exact impact of ongoing events on the estimates due to lack of clarity, one thing is very clear that the company will not be able to replicate the historical performance on the profitability front. We had come up with a 'Buy 'recommendation on the stock in April 2011 and our target price was met within a period of four months.

As per our revised estimates, we expect the Returns on Net Worth (RoNW) to come down to 16% by the end of FY14 (from 28% in FY11). Since the upsides to the stock price are very limited from the current levels, given the change in regulations, we would advise investors to Sell the stock, in case they did not do so when the target price was met.

Warm Regards
Team Equitymaster

Gas utility stocks slide as PNGRB orders tariff cut in Delhi

Indraprastha Gas lost 30.63% to Rs 240.55 after sliding as much as 50.92% at the day's low of Rs 170 in early trade. The counter clocked high volume of 68.53 lakh shares on BSE.

Gujarat State Petronet declined 7.05% to Rs 71.20 after sliding to an intraday low of Rs 63.10. The counter clocked high volume of 15.46 lakh shares on BSE.

Gujarat Gas Company shed 5.65% to Rs 380 after slumping to an intraday low of Rs 350. The counter clocked volume of 1.46 lakh shares on BSE.

Petronet LNG slipped 4.95% to Rs 156.55 after falling to an intraday low of Rs 142. The counter clocked high volume of 19.58 lakh shares on BSE.

GAIL (India) dropped 3.61% to Rs 350 after slipping to an intraday low of Rs 326.35, also its 52-week low. The counter clocked volume of 1.62 lakh shares on BSE.

The Petroleum and Natural Gas Regulatory Board (PNGRB) slashed network tariff and compression charges for CNG in respect of the Delhi compressed gas distribution (CGD) network of Indraprastha Gas with effect from 1 April 2008. Indraprastha Gas had proposed to the board a network tariff of Rs 104.05 per million British thermal units and compression charge of Rs 6.66 per kg of CNG. The board approved Rs 38.58 and Rs 2.75, respectively, bringing these down by 63% and 58.7%. PNGRB has also asked the company to make refunds since the 2008-09 financial year based on the revised changes, since that was the first financial year of operation for the company after the regulator came into being in October 2007.

PNGRB said that it will issue directions on how the company should refund the excess tariff charged to customers for the last four years at a later date.