This is a Rs 1 face value stock which is available at Rs 4.50 paise. This is a company which manufactures ferro alloys. The company has got its plant located in Andhra Pradesh with a capacity of about 72,000 tonne per annum. They came into existence upon the demerger of the Facor Group in 2004.
The company operates in a sector which is highly cyclical. We have seen a company like Ferro Alloys make humongous amount of profits during the boom cycle and also make heavy losses when the cycle turns negative. From that perspective, the margin of safety and risk management in these kinds of stocks becomes very important.
Second is, this company does not have any captive source of raw material supply or power supply which are two critical input costs as far as the ferro alloys industry is concerned. This company is assured raw material supply because it buys raw material from one of the group companies but that is done at market related prices. In case there is a scenario that the finished product cost comes down and the raw material cost goes up, that kind of a scenario can hurt the company badly.
If we look at the financials of the company, in the first nine months of the current financial year, the sales have increased by close to 60% to about Rs 300 crore. The company has made an operating profit of about Rs 40 crore, paid a tax of about Rs 13 crore for the first nine months and made a profit after tax (PAT) of about Rs 26 crore which the annualised EPS is going to be about 1.5 to 1.6. So at the current price of about Rs 4.50 paise this stock is traded at a PE multiple of less than 3.
This is a debt free company. Their current marketcap is close to about Rs 88 crore. They have got cash which is lying in fixed deposits of close to Rs 50-52 crore. They also have got investment in a group company of about Rs 15 -16 crore. If we value that investment at par, you get a cash equivalent of Rs 65 crore. These are the figures as on March 31, 2010.
You are practically getting this company at an enterprise value of about Rs 25 crore. They have made a PAT of about Rs25 crore in the first nine months. If I add that profit into the cash which is there in the company, I am getting this company virtually at zero cost. This is a company which provides margin of safety. They also made a PAT of close to Rs70 crore in 2008 which was a boom year for the ferro alloy industry.
As a current valuation, the downside practically looks very negligible. At the same time, the upside may also be capped at about 50-100% from the current levels because this company does not have access to its own power and raw material source. In case they are able to do that there could be more upside.
Source: Internet (moneycontrol.com by Ashish Chug)
