The multiplier effect -Possible 'split' candidates
Courtesy:SmartInvestor (Business Standard)
(Rakesh P Sharma and Sameer Chavan cehck out the likely bonus candidates)
The ongoing political uncertainty has made investing a difficult exercise. Investors have to become cautious and selective as far as fresh investments are concerned. In such a situation, one investment strategy is to look at stocks which have a high ratio of free reserves to equity and could in turn reward the shareholder by a bonus issue. The best time to enter such stocks is just before the bonus announcement.
In order to help investors maximise their gains, The Smart Investor decided to work out a probable list of companies which could reward shareholders with a bonus issue in the near future. The companies were shortlisted after considering their free reserves, equity capital, past bonus history and its performance in the recent past. And even if these companies may not announce a bonus, they remain attractive long term buys. However, one caveat has to be kept in mind that even though there may be indications of an impending bonus, ultimately it depends on the management decision.
Britannia Industries
With free reserves of almost 5.3 times its equity, Britannia Industries is a good bonus candidate. It has been almost nine years since the company has rewarded its shareholders. Its last bonus issue was way back in March 1990 in the ratio of 1:2. It has a book value of Rs 75.
Britannia has an established presence in bakery and confectionery products through a variety of biscuits, breads and cakes. In the last two years, the company has restructured its entire product portfolio to become a comprehensive food and beverage company and has launched cheese, butter and dairy whitener. Just recently it rolled out its flavoured milk brand ‘Zip Sip' in tetrapacks. All these products have been well received by the market. In the coming years, the contribution from new products is expected to increase substantially as the company plans to increase its rural presence by almost 70 per cent of sales by 2001.
Britannia has also built a new corporate identity and has adopted a new logo with a new base line ‘Eat Healthy, Think Better'. It has projected a turnover of Rs 1,800 crore by the year 2001. The company commands a tremendous brand equity. In a recent survey conducted by A&M magazine and ORG-Marg, it stood fifth in the country and was the only food brand to figures in the top ten.
Groupe Danone, the world's seventh largest multi-product company, holds a 22 per cent stake in the company and has FIPB approval to hike it to 51 per cent.
For the nine months ended December, sales was up 22 per cent to Rs 760.4 crore. Net profit rose 34 per cent to Rs 53.6 crore. Britannia's World Cup contest has generated a lot of excitement in the market and should translate into at least 30-40 per cent additional sales in the last two months. These will be partly reflected in its March 1999 results and the first quarter of 1999-2000. Buy at Rs 1437.
Cadbury India
The market has been abuzz with the rumour that there is a bonus in the offing at Cadbury. The reasons are not difficult to fathom. Its free reserves are almost 6.67 times its present equity. The company has been pretty liberal in rewarding its shareholders as 60 per cent of its equity of Rs 23.8 crore has been through bonus issues. Cadbury's last bonus issue was in July 1996 in the ratio of 3:5. Its debt-equity is a mere 0.12 times. It has a book value of Rs 76. The possibility of a bonus becomes stronger as the company finished fifty years last year but didn't issue a bonus.
Cadbury's first quarter performance ended March 1999 has been excellent. It registered an 88.41 per cent rise in net profit to Rs 9.27 crore. Net sales improved 16.54 per cent to Rs 116.05 crore. Operating profit margin improved to 15.77 per cent from 12.38 crore. Analysts attribute this to price rationalisation undertaken by the company in the first quarter.
In the first quarter, Cadbury hiked the prices of its popular brands such as Dairy Milk, Perk, Bournvita and Crackle. However, the company spared new launches such as Cadbury Gold, Picnic and confectioneries. It did not hike the 5-Star price too. The price of Bournvita (1 kg) was hiked by Rs 5 to Rs 170.
According to analysts, Cadbury's dual strategy of getting into mass market with confectionery and pushing products in the high value segment has ensured both growth in volumes and margins. It is also increasing its distribution outlets from around 400,000 to 500,000 in the next two years. Above all, the company is looking at avenues to maximise profits through property development in Mumbai. All these efforts should see the company rewarding its shareholders in the comings years. This also appears to be an excellent opportunity to accumulate this stock at Rs 789.
Electrosteel Castings
Electrosteel Castings looks good for a bonus in the near future. The company's free reserves as on March 31, 1998 stood at Rs 89.66 crore about 11.12 times its equity of Rs 8.06 crore. The company has been a consistent performer over the years. In the last three years, it has achieved a compounded annual growth rate (CAGR) of 14 per cent in sales.
Electrosteel has a virtual monopoly in a segment of its business. It makes cast iron (CI) and ductile iron (DI) spun pipes. The company pioneered the manufacture of DI pipes in India and continues to hold a near monopoly status in this segment. In the CI segment, Electrosteel is the dominant player with a market share of around 55 per cent.
For the nine month ended December 1998, Electrosteel has already achieved a net profit of Rs 42.64 crore surpassing the Rs 38.25 crore it had achieved in the whole of 1997-98. On annualising the net profit, the company, on a conservative basis should achieve at least a 50 per cent growth in net profit for 1998-99.
The company is set to perform well in the future too. Currently, DI pipes have a low penetration in the country, world over DI pipes have replaced other substitutes. In India too, this trend is beginning to emerge which throws up immense opportunities for the company. Electrosteel has also made in-roads into the export market.
The company's growth to a large extent depends on the government's capital outlay and the allocation of funds for water supply and sanitation and also to the extent to which private investment comes up in the core sector. As such, an increased investment in infrastructure in the future and a pick-up in the economic activity will help the company. The scrip currently trades at Rs 304.80.
Hindustan Inks and Resins
In spite of a strong performance and an excellent reserve position, Hindustan Inks and Resins (HIRL) has not yet rewarded its shareholders with a bonus. The company has free reserves almost 8.50 times its equity. It has a very low debt-equity of 0.86 and a current ratio of 1.39 times. It has a book value of Rs 120. The stock is now trading at Rs 243.
HIRL, a flagship of the Bilakhia group, has presence in the printing inks, synthetic resins, industrial adhesives and wire enamels segment. For the nine months ended December 1998, the company registered a 117 rise in net profit to Rs 151.17 crore and a 52 per cent jump in topline to Rs 130.34 crore. HIRL's excellent performance can be attributed to the boom in user industries, especially the fast moving consumer goods (FMCG) sector. Also, closure of a number of unorganised inks units, which constitute a large part of the industry, helped HIRL increase its market share.
HIRL has also entered the export market, probably the only ink manufacturer in the organised sector to do so. HIRL has also made sizeable investments in building infrastructure facilities for future growth. In 1997-98, it has invested Rs 9.23 crore for expansion of manufacturing facilities and upgrading its infrastructure.
HIRL plans to foray into the security inks segment which is entirely met by imports at present. The company is awaiting various approvals for its products and expects to start production by end-2000. According to estimates, demand for security inks ranges between Rs 50-100 crore and very few companies own this technology to manufacture security inks. It is for this reason that there are no players in this segment until now. HIRL has developed its own technology.
Recently, Mitsu Industries - a group company - had entered a joint venture with German agrochem major AgrEvo for its pyrethroid business. The deal helped the group rake in US$ 65 million. The group is now drawing up a blueprint to plough these resources into existing and new businesses.
ITC Ltd
The market expects tobacco major ITC to declare a bonus soon. The company has declared a bonus thrice in the past, the last being in September 1994 in the ratio of one share for one. ITC's free reserves as on March 31,1998 stood at Rs 980.38 crore about 4 times its equity of Rs 245.41 crore.
ITC is the largest cigarette company in the country with a market share over 70 per cent. It has a wide range of brands and dominates all the segments of the market. The company also has business interest in hotels. Over the last few years, it has been divesting its interest in other non-core businesses.
After recording flat cigarette volumes in 1997-98 and for the most of 1998-99, the company is likely to post recovery in volumes in the current financial year. ITC stands to gain from the minimal excise duty hike in the recent budget. Conversely, the company has recently hiked prices of some of its brands. The continuing upgrade of its product mix (more filter tipped cigarettes rather than plains) will also improve margins.
Its excellent performance over the last two years was possible because of the consumer being pushed up the value chain of cigarettes. This was possible because the excise duty change in the past was such that the price differential between the Kings and Longs (both premium cigarettes) and the Regular Filters (RF) (medium category) was reduced. Thus, many consumers were pushed up the value chain. This increased margins and profitability of the company.
In the first nine months of 1998-99, the company has recorded sales of Rs 5,677.82 crore and a net profit of Rs 485.78 crore. According to some estimates, in 1998-99 the company is expected to post a turnover of Rs 3431.4 crore and 20 per cent rise in net profit to Rs 631.7 crore. The scrip currently trades at Rs 935.
Pidilite Industries
Adhesives major Pidilite Industries issued a bonus in October 1996 in the ratio of 1:1. The company's free reserves, then, stood at Rs 66.70 crore about ten times its equity of Rs 6.12 crore. It could once again reward its shareholders with a bonus. As on March 31, 1998 its free reserves stand at Rs 93.62 crore about 8 times its equity. About 80 per cent of its equity capital consists of bonus shares.
Pidilite has been a consistent performer over the years. It has recorded a compounded annual growth rate (CAGR) of 19.5 per cent in turnover and 35 per cent in net profit over the last five years. The company's sales could be broadly divided into three divisions. The adhesive division, under the flagship brand name Fevicol, accounts for 54 per cent of sales. Industrial products which include dyes, pigments and synthetic resins accounts for around 25 per cent of its sales while consumer products like colours and gums account for 12 per cent. The rest is its turnover from exports.
Pidilite is the undisputed leader in adhesive products with a 60 per cent market share. Its closest competitor Vamicol has a market share of around 10 per cent with the unorganised sector accounting for the rest. Pidilite is expected to continue its dominance of this market. Its sheer reach in the market will be very difficult to replicate. It has 30,000 dealers and distributors and three lakh retail outlets and over 2000 industrial consumers. As such, it reaches every segment of the market.
In the first nine months of 1998-99, the company's sales have increased 9.61 per cent to Rs 252.80 crore while net profit has gone up by 30 per cent to Rs 29.36 crore. The company now has plans of restructuring its business. It is planning to hive off its industrial products business into a separate joint venture and focus on its mass market products. Though this will have an impact on its performance as this business contributes around 25 per cent to its turnover. The increased focus on its other businesses should help. The industrial products business was also responsible for holding back Pidilite's growth in the past due to a fall in growth rates of user industries.
Further, the proposed hive-off is a positive step for the company as it will increase the contribution of branded products in its turnover to 100 per cent from the present 60 per cent. Another reason for optimism is that the business proposed to be spun off is a low-margin, capital-intensive commodity business. All this should improve valuations in the scrip. It currently trades at Rs 435.50.
Punjab Tractors
One of the most investor friendly companies, Punjab Tractors is said to be a strong bonus candidate. The company has declared two 1:1 bonus issues, in 1992 and 1996. About 77 per cent of its equity is made of bonus shares. Currently, its free reserves at Rs 206.75 crore are 10.20 times its equity capital.
The company has been an exceptional performer over the years and is expected to continue on its growth path in the future. It derives its strength from the excellent relations it enjoys with its customers and dealers. The company is open to suggestions from dealers and customers. Dealers have unlimited access to top management.
As a result, the company is able to incorporate valuable suggestions made by its customers and dealers. This also helps in continuous product improvement. In an industry where the dealer is one of the main intermediaries, this is a tremendous advantage.
Such is the company's strength that it has the distinction of being the only company to conduct sales entirely against customer advances. It does not have the concept of sales depots or warehouses either, which is a common practice of competition. Orders are generated directly by the field force which works in conjunction with the marketing function. This business cycle ensures a shorter working capital funds requirement, thus increasing profitability.
All these factors place the company on firm ground to benefit from the expected growth in the tractor industry. Sales in near term are bound to grow due to strong agricultural growth. The northern states of Punjab, Uttar Pradesh, Haryana, Madhya Pradesh and Rajasthan are expected to be the major beneficiaries and since Punjab Tractors has a major presence in this region, it is clearly placed on fertile ground. In Punjab, it commands a market share of 24.5 per cent, in Haryana 16.1 per cent while in MP and UP its share is 17.7 per cent and 19.9 per cent respectively.
The tractor industry is expected to grow at around 8-10 per cent. However, given Punjab Tractors proven ability to gradually advance its market share year after year, there is no doubt that the company will grow faster than the industry growth of 8-10 per cent. The company has doubled its market share from 8.5 per cent in 1983 to 16.6 per cent now. It intends to increase its market share to 20 per cent over the next two years. The stock is now trading at Rs 1342.
Zee Telefilms
In spite of all the major restructuring, Zee Telefilms (ZTL) is yet to reward its shareholders with a bonus shares. It has free reserves of about 6.40 times equity. It has a low debt-equity ratio of 0.29. It is also yet to issue its first bonus to its shareholders.
ZTL has initiated integration of its different activities into one business, at the operational and managerial levels. Last year it had merged its fully owned subsidiary Ambience Space Seller, a very profitable business unit exclusively responsible for advertising sales for Zee TV, Zee India and Zee Cinema. As a part of its strong brand building exercise, ZTL has instituted annual ‘Zee- Cine Awards' for excellence in Indian cinema. It recently launched a film magazine Premiere. In line with its long term plan of being a one-stop entertainment shop, ZTL is also venturing into production of Hindi films. Also on the cards are seven regional language channels.
For the nine months, its revenues were up 29 per cent to Rs 168.59 crore and net profit rose 34 per cent to Rs 43.79 crore. Recently, ZTL managed to hike its advertising rates by 25 per cent. ZTL has been a major beneficiary of the budget. The budget has completely exempted tax on earnings from TV software etc. Buy at Rs 1128. |
