Tuesday, February 21, 2017

Q3 FY'17 Result Updates

I am sharing few thoughts initially, which are strictly mine and has no intention of driving any investors to any conclusion.

This was probably the most anticipated result season for past many quarter, as Indian economy went through a major reform in form of demonetisation of major currency notes with an intention of curbing the black money. The same was bound to have negative impact on various sectors and their growth, and eventually the growth of nation, as one cannot deny the extensive use of black money in India, especially among the companies from un-organised sector. Among the organised ones, the impact was expected to be maximum in real estate & construction sector, followed by auto sector and then to some of the sectors which are directly related to those 2 sectors like furnishing, cement and auto-ancillary, to name a few. Every body was anxious about how the numbers would turn out to be for companies in those sectors, and how management would ensure investors confidence in their respective companies.

The above para negative mindset about the government's move on Indian market, however, as usual, there are always 2 sides of the coin, and demonetization was no different. There are few positives as well, but most of them will take time to reflect in form of numbers, and hence are lesser discussed then the negative ones. The move is expected to improve government spending, especially in infrastructure, which would benefit the nation and indirectly benefit some of the companies from the most beaten down sector i.e. construction and real estate. The move in fact, is also expected to bring down inflation and hence the interest rates, which would enable common people to invest more in properties and their vehicular needs.

Coming to numbers, I feel that they were not as bad as it was expected,.

Ajanta Pharma continues to post decent growth, aided by huge growth coming from US market, where it had almost negligible presence till last year. The growth from some of its larger export market seems to be flattening, which can be considered as a reason to worry. But if US and India continues to contribute well, they should not see a major impact in their overall growth. Margin continues to outperform peers which is a big positive. The stock might still continue to act as steady compounder for next few years.

Granules India also posted decent numbers. With company trading around 18 P/E and having lots of positive triggers in next 2 years, most of the brokerage houses are bullish on the company and have given their targets in the range of 150-220. Recently, one of World Bank unit IFC has confirmed investment up to 47.5 million dollars in the company, which shows their confidence in future of the company.

Can Fin Homes and Dewan Housing has shown superb run away rally in past few days, as it is assumed that NBFCs are most likely to benefit from the government's move. Both of them are well on track and have continued their performance even in last quarter. Capri Global somewhere falls in the same category and hence is also likely to benefit. Some of the new names that I have come across in the sector, are Bajaj Finance and PNB Housing Finance, which obviously have run up a lot in past, but still from a business perspective, they seem to have very bright future. Currently, I am not holding either of them, on account of lack of cash in hand.

Now coming to one of my favorite sector, which unfortunately took a hit on account of demonetization i.e. home furnishing, where we have been tracking Cera Sanitaryware and Somany Ceramics from long time. The good part was that both the companies outperformed their peers and posted results which were much better than expectations, and accordingly market has rewarded them. Even in times of crisis, both of them are not very far from their all time highs. I continue to remain positive on both of them.

Coming to another sector which was indirectly expected to take a hit on account of such move, is auto ancillary. We have been mainly tracking SSWL and FIEM Ind from that sector. The results were surprisingly contradictory. Even in such a quarter, SSWL showed 19% growth in sales which is phenomenal. The same was mostly aided by sales in truck and tractor segment which has seen significant uptick in recent times. In fact, on account of that the company even raised its sales target for this quarter. The profit saw a decline, but as I always say, I won't mind company posting de-growth in profit for one or two quarter, if their sales growth in on track. And as such, if you see, the company is still trading around 15 P/E. I know debt is a concern, but one needs to consider nature of business and the fact that they have not let it increase in past 4 years. The stock has already appreciated close to 200% from the time we started the discussion here. Talking about FIEM, the sales saw a decline, which was quite obvious, as 2 wheeler sales were most impacted in the auto sector, and 96% of their revenues come from there. Even in that sector, Honda Motors saw the biggest de-growth which is the highest contributor to FIEM revenues. So, considering all these, I don't think the numbers were bad. I won't comment on price, as it has already seen good appreciation from the time we started its discussion.

No change in views for PI Ind and Dhanuka Agritech. Both seems to be doing very well, and accordingly they are trading at almost their all time high levels.

Garware Wall Ropes is getting better and better with every quarter, and seems to quite easily achieve the management's vision of 2020. Sales growth was moderate on account of decline in domestic sales due to demonetization but it was offset by higher exports, which is very good sign. Growth would certainly be higher once the domestic impact is over.

Lincoln Pharma has continued to see a decline in sales, because of the fact that they have stopped their trading business in India. However, the sales of their core products is growing fast. The decline in sales seems temporary. The margins are also improving thick and fast. The contribution from exports of branded products is also increasing and management is expecting it to contribute 50% of the total revenues in next 3-4 years. It might look cheap at current market price, but may be market is in a wait and watch strategy, as it might not be fully convinced with management words. Who knows!!!

Salzer Electronics has continued to face challenges, on account of lesser orders from EMS compared to last year. Also sudden rise in commodity price kept the profits under check. The company has decided to increase the price from Jan onwards, which will help regain their margin levels. Good part is that the company has received order worth 18.7 Cr in that segment recently. The other positives being that the company has started the commercial production and invoicing of Three Phase Dry Type Transformers from Jan'17. Also the company received its first order from Smith's Detection which is a German based company manufacturing Airport Security X-Ray Machines and received first order from Alstom. All in all, it seems that they have few triggers for growth in future. 4th quarter numbers will be interesting to watch out for.

Srikalahasthi Pipes, one of the companies we started discussing off-late, is also from a sector which was likely to get impacted. However, the impact in results seems to be very limited. The growth in sales and profit both were flat yoy, which is not bad considering the situation in the sector. Also, the margins continued to remain at same levels, and much higher than its peers. If we go by what management said while the shutdown was going on in Q2, the Q4 numbers should be pretty good, as they did not reduce their annual guidance, in spite of one month shutdown in that quarter. Higher debt levels, lesser transparency of management towards investors, and non-performance of other group companies continues to keep the stock below 10 P/E, but lets see for how long, if they keep on performing well. The increased spending in infra, post demonetization should also help the company get good number of orders.

Next in the list is Force Motors. Results as expected saw a 15% decline in sales as well as profits. One of the reason was mild decline in sales of luxury cars (Mercedes and BMW), which is very likely to recover in Q4, and hence indirectly helping Force Motors. Company is having very good market share in LCV segment, where demand is expected to rise after one lackluster quarter. Also with new models launched by the company in that segment, their market share might increase further.

Kitex Garments posted another strong set of numbers, and it seems that the management confidence as seen in the concall post few major concerns in the past, does not seem to be over optimistic. However, market will always take its own time, before giving back the similar valuation to the company, as it had in the past.

Poddar Pigments also delivered good numbers, and it continues to enjoy decent market share along with Plastiblends in the sector. Plastiblends has been followed here since long time, but with the expectation of masterbatches industry growing at around 15-20% CAGR for next 5 years, I thought it isn't a bad idea to go ahead with 2nd largest company in that sector as well. Plastiblends has already given multiple returns since we started discussing.

Pricol also saw a minor impact on account of government's move. However, even there the impact is not expected to last long with most of the auto companies getting their sales back on track. The company was not getting traded from Dec to mid Fed on account on procedural reasons due to the amalgamation taken up by the company. With excellent customer base, both from domestic as well as international auto companies, and with good market share of some of its products in the industry, the company might well get back to good growth from Q4.

I am not a research analyst, nor an investment advisor. Through this post, I am only putting my views, and which has nothing to do with any action that can be taken by readers on any specific company.