Monday, November 9, 2009

Ador Fontech - Certain multibagger in long run

Ador Fontech Ltd is an Ador group company. The other well-known company under the same management is Ador Welding Limited. The primary business of Ador Fontech is – Life enhancements of vital machinery components. 
The Company supplies products, services and solutions that help in conservation of mineral reserves. This is done through implementation of value- added reclamation, fusion, surfacing and coating solutions. The following factors make it a good value bet for the long term investors.

Outlook:-
Considering the growth in various user industries such as steel, cement, power, mining, metallurgical complexes, Ador Fontech’s core business of recycling and life enhancement provides an increasing window of opportunity,as India being on the path of growth needs such industries at large scale and that provides an oppurtunity for players like Ador Fontech. 
The company basically manufactures and trades such reclamants, surfacing and coating solutions. 
The company has 4 manufacturing units: 2 in Bangalore, 1 each in Nagpur & Ahmednagar
In the trading segment, the company exclusively represents in India renowned international companies like Euro mate, Cepro, Sulzer Metco, Gasflux, Arco plate, Alloy steel, Deloro Stellite international for their products.

Product & Services:
The products and services of the company can be categorized as follows:
Low heat input welding alloys
Hard-facing and wear resistant products
Welding,cutting and welder safety equipment
Fon reclamation services
In-situ reclamation services
Therma spray technology, services and solutions

Business Opportunities:-
There is a plethora of opportunities to enhance the market share of the Company and also to bring in newer concepts related to repair and refurbishment operations as it is in the life enhancement segment so it can bring down replacement cost of machinery and equipments for the companies thus improving their bottomline. 
The main threat lies in the fact that there are many players both in the organised and organised sector but given the oppurtunities, there is still room ahead with India growing and industrialization taking place in a major way.

Financial Highlights:-
The company has a small equity base of Rs 3.5 crores and does not have any debt on its book, a conservative approach. 
Over the last five years the net profit of the company has increased from 1.51 crores to 8.82 crores on sales of 101 crores for FY2008, and the company generated positive cash flow of 7.8 crore from its operating activities for FY2008. 
The promoter holding has increased steadily from 19% as at sep 4,2007 to 24.28% till recently. For the three quarters ending dec,08 company hasmade a net profit
of 6.08 crores in comparison to 5.14 crores for the same period last year. A good showing considering cost cutting across all sectors. The company is conservatively capitalized with no debt.

Valuation:-
The company has been regularly scaling up dividend. It paid a dividend of 25% in 2004, 35% in 2005 , 40% in 2006,50% in 2007 and 50% in 2008.
Between 2003 & 2008, Ador Fontech’s revenues have grown at a CAGR of 19% and Net profit at a CAGR of 42% highlighting the increasing efficiency of operations.
Low promoter holding is not a matter of concern as promoters have increased their holding over a period of time as mentioned earlier. 
At the current market price of Rs.140, the company offers a high margin of safety because of its consistent dividend record & also an opportunity to invest in a niche growth sector at attractive valuations.

Saturday, November 7, 2009

ICRA - the next multibagger in making in India, November 2009

Under some circumstances, betting on the number two player in the industry is more fruitful than betting on the leader. Investor Information and Credit Rating Agency (ICRA) is a classical example for this. 

India has largely undeveloped market of debt products. NSIC (National Small Industries Corporation) has formulated a Performance & Credit Rating Scheme for Micro & Small Enterprises which will provide a major kicker. 

NSIC in consultation with Credit Rating Agencies and Indian Banks’ Association has formulated a Performance & Credit Rating Scheme for Micro & Small Enterprises. The National Small Industries Corporation (NSIC) has been appointed as a nodal agency by the Ministry of Micro, Small & Medium Enterprises to implement the scheme. NSIC empanelled the leading credit rating agencies like CARE, CRISIL, Dun & Bradstreet, FITCH, ICRA, ONICRA and SME Rating Agency of India Ltd (SMERA) to conduct the rating of interested Micro & Small Enterprises under the scheme. While the criteria of finalization is left up to the individual rating agencies, the symbols and the definitions for indicating the risk score has been evolved on uniform basis for implementation by all rating agencies. The scheme was launched on April 7, 2005 by the Finance Minister and Minister of MSME .

 
Selection of the Rating Agency 
  

In the Scheme the micro & small enterprises are at liberty to select any of the rating agencies empanelled with NSIC. These Enterprises are required to mention the name of the rating agency selected by them in their request for obtaining the rating.

 
Rating Fee

 

The Rating Agencies have different fee structure for the rating services provided to various clients including Micro & Small Enterprises. The fee structure for Micro & Small Enterprises has been devised separately under this Scheme. 

 

The Rating Fee to be charged will vary in accordance with the evaluation criteria adopted by various Rating Agencies and their acceptability also varies with the users. 

 

These Agencies are required to intimate their rating fee to NSIC at the time of empanelment, making it known to both the parties. The fees may, however, be reviewed by Rating Agencies from time to time keeping in mind the competition and the number/size of clientele. A ceiling has been prescribed by the Government to subsidize the fee. 

 

  The MSEs pay rating fee along with their respective applications. The payment can be made by pay order/demand draft drawn in favor of the Rating Agency selected by the Micro & Small Enterprises.

 

In the case of a request for rating being treated as closed by the Rating Agency due to non-receipt of the complete information, fifty per cent of the fees received from the Enterprise is refundable. However, if the MSE backs out from the rating process after the Rating Agency has carried out its inspection, no amount is refundable. 

 
Sharing Of Fees

 

The Rating fee to be paid is based on the turnover of the Micro & Small Enterprise, which has been categorized into three slabs. The slabs of the turnover and the share of the Ministry in the fee charged by the Rating Agency is:- 

 
Turnover 
Fee to be reimbursed by Ministry of MSME

Up to Rs.50 lacs 
75% of the fee charged by the rating agency subject to a ceiling of Rs.25, 000/- 

Above Rs.50 lacs to 

Rs. 200 lacs 
75% of the fee charged by the rating agency subject to a ceiling of Rs.30, 000/- 

Above Rs.200 lacs 
75% of the fee charged by the rating agency subject to a ceiling of Rs.40, 000/-


 

The balance amount towards the fee is borne by the Micro & Small Enterprises.

 

The portion of the fee to be subsidized by the Ministry is released through NSIC after submission of the Rating Report to NSIC by the Rating Agency. 

 
Rating Scales

 

While the criteria for evaluation is set by the Rating Agency, the symbols and their definition for indicating the risk score in the rating awarded has been evolved for uniform implementation by all the Rating Agencies. These symbols depict both the performance evaluation as well as the credit worthiness of the unit.

 

The Rating is to be prefixed by the word NSIC and its valid for a year from the date of issue of the rating report.

 
Sharing of Rating of Small Enterprises

 

The Rating Agencies share the Rating awarded to Small Enterprises with NSIC.

 
Process of Application

 

The Small Enterprises are required to submit their applications for rating in duplicate and they can be submitted to any of the offices/branches of NSIC or directly to the Rating Agency selected by the Small Enterprise.  

 

  On receipt of application, NSIC forwards the second copy of the request along with the information and documents to the Rating Agency along with their comments, if any. Alternatively, if the application is submitted to the Rating Agency, one copy of the application is sent to NSIC for their reference and comments.  

 
Promotion Of The Scheme

 

NSIC is creating awareness about the Scheme, among the Small Enterprises by conducting various open house/exclusive sessions. Various Industry Associations and Rating Agencies are also being involved in these programs. The Scheme is also being propagated through seminars and campaigns conducted by NSIC. Efforts are being made to popularize the Scheme, so that maximum number of units can avail its benefits. 

 

NSIC has tied up with banks such as Oriental Bank of Commerce, UCO Bank, United Bank of India, Central Bank of India, Bank of Maharashtra, YES Bank, UTI Bank, Karur Vysya, Union Bank of India and HSBC Ltd. and others. It has been agreed upon by the banks that the bank will promote the units applying for credit support under this arrangement and it will also re-calibrate the interest rates and security norms while considering the sanction of their proposals.

 
Performance 

 

The Scheme is getting good response from the Micro & Small Enterprises. Till September 30, 2009, a total of 16,000 units have applied for the rating and various rating agencies have already awarded the rating to 15,000 units.  


ICRA is primarily in the business of rating financial instruments for various entities. The competitive structure of the industry in which it operates is highly oligopolistic. The demand for rating services are increasing more than ever and the entire sector is demonstrating robust growth. The business itself runs on low debt and strong operating margins in excess of 50%, which makes the cash flow even stronger. 


ICRA is going to gain tremendously from the systemic structure and the recent norms issued by RBI and the Government regarding borrowing requirements of various entities through banking system. Even the larger businesses wanting to raise debt from open market now prefer availing services of more than one rating agency. This is to make the borrowing programme attractive by tapping the investors’ comfort as the debt offer is rated by two or more independent agencies. Till now ICRA has benefitted and should continue to benefit as the practice of availing the services of two rating agencies becomes wide spread. 

Besides credit ratings, ICRA is also engaged in advisory, outsourcing and information and IT services, but rating services contributes almost 64% of the revenues and 92% of the operating profit. ICRA’s consolidated revenues grew at 34 per cent CAGR in the last three years (FY 2007- FY2009) while net profit grew by 43 per cent in the same period. 

The key source of growth in the future would be the RBI mandate for compulsory ratings for bank loans exposure. As per the Industry estimates, about 55 per cent in volume of the current loan exposures of banks and about 30 per cent by value is not rated. As per the stipulation, the ratings process must be over by end of 2008-09 for all commercial bank loans of above Rs 10 crore. Else bank will have to set aside more capital for such un-rated loans (through higher risk weights). This will encourage banks to get the ratings done on the existing loans as to release more lendable resources. Correctly spotting this as an opportunity, ICRA has signed MoUs with many banks for providing rating services to source more revenues. Other than this one time opportunity, fresh loans to be given by banks also require rating, ensuring a steady demand for ICRA’s rating services. The banks on their own will come to debt market to raise Tier – II capital in order to meet their capital adequacy norms, again requiring ICRA’s services. In the September 2008 report on currency and finance released by RBI, it is estimated that the banking sector would require additional capital of Rs 5,68,744 crore over the next five years to maintain capital adequacy of 12 per cent. 

Apart from banks, the debt offerings from India’s corporate will be the key medium to long-term revenue driver for rating agencies such as ICRA. With the difficult state of affairs in the global credit market, many Indian companies have turned to domestic debt, which will play a major role in India Inc’s capital raising plans over the next five years. The sublime interest rate scenario will also fuel the corporate bond market. In addition to corporate bonds, state and local level entities (municipal bonds and state level bonds) are also expected to tap the market for funding requirements. Though in an early stage of development, the securitisation market also offers huge potential. 

However, poor show on the non-rating business front is likely to bring down the overall operating margins in future. The benefit of acquisitions of Axiom Technology and Sapphire International by ICRA’s IT services division is yet to be seen. 

At the CMP of Rs 780 per share, ICRA is available at the multiple of 15 FY10 expected earnings of 50Rs per share.

Any fall in its current market price, will make the fresh position on it attractive. Investors’ looking for steady and decent returns from medium term perspective should become interested in this counter.

Sunday, October 25, 2009

Utensils Market (TTK Prestige and Hawkins Cooker) in India presents multibagger opportunities

TTK Prestige and Hawkins Cooker present wonderful opportunities to grow the money multifold times. With very high ROCE ratios and rural India being at the cusp of upgrade cycle of cookers - it presents once in a lifetime opportunity to grow the money multifold.

Following is the logic for buying TTK Prestige:

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Company Brief
TTK Prestige Ltd. is the largest provider of kitchen appliances in the
country. It has a varied product portfolio ranging from pressure
cookers, non-stick cookware, and gas stoves to electrical appliances
and kitchen tools.
Highlights
TTK’s has been able to de-risk itself from being a single product
Company to “a total kitchen solutions provider.” by extending its
brands that includes over 400 products in 16 categories.
It has diversified into retail by setting up “Prestige Smart
Kitchens”. TTK has about 173 Smart Kitchen outlets across 16
states and 116 towns in India as on FY08 and plans to open more
such outlets in next two years. TTK is expected to benefit from
these initiatives, as margins in direct retailing are higher than
those in traditional dealer sales.
The company sells modular kitchens, through its exclusive
outlets "Prestige Smart Kitchens". With growing emphasis on
“one stop shop” the modular kitchen market is huge and it is set
to grow a rapid pace.
TTK Prestige launched its second retail format 'Prestige Kitchen
Boutique' in February 2008, which is an exclusive retail initiative
that showcases a gamut of designer modular kitchens. With the
increase in economic & realty boom, this will lay a platform for
the company to go to the next level of growth.
TTK Prestige is also gearing up to unlock value in its real estate
holdings in Bangalore and has forayed into realty development. It
is building a retail mall on it to add another revenue stream.
At the current market price of Rs 300, the stock trades at a P/E
multiple of 7x FY10E earnings. It is also attractively valued at
FY09E EV/EBITDA of 4.0. We recommend a “BUY” on the
stock with a price target of Rs 1000 in three years, assuming a P/E multiple of
10x FY12E earnings, an upside of 250% from the current
levels.

Investment Arguments

Pioneer in kitchenware segment -


TTK Prestige is India's largest manufacturer and marketer of the most comprehensive range of
kitchenware within the consumer durable space. In the pressure cooker market alone, TTK Prestige
has 37% of the volume share and close to 40% of the value share. It expanded its presence into
nonstick cookware and currently enjoys a leadership position with almost 50% of this market.
Clearly, the changing face of urban India is reflected in the sales of TTK. The company claims to
have a huge customer base, with nearly 2.5 million consumers being added to this base every
year and targets to take this figure upwards to 3 million in the coming 12 months. The
changing lifestyle, double income family structures, rising income levels and preference for
the safe and branded products augurs well for the company.

Aggressive retail expansion –


Over the past three years, the company has tried to diversify into retail by setting up ‘Prestige
Smart Kitchens’ through franchisees and its own establishments in various states. It has about
196 Smart Kitchen outlets across 16 states and 116 towns in India as on FY09 and plans to open
more such outlets in next two years. Such stores offer kitchen solutions and some of them even
have modular kitchen designs.
With retail market booming, the company’s foray into retail will drive future growth, as there
is a good recall and high regard for its "prestige" brand, which signifies quality and
safety. TTK is expected to benefit from these initiatives as margins in direct retailing are
higher than those in traditional dealer sales.

“Prestige Kitchen Boutiques” A New retail format –
TTK Prestige launched its second retail format 'Prestige Kitchen
Boutique' in February 2008, which is an exclusive retail initiative that
showcases a gamut of designer modular kitchens. Currently there are 2
stores in Bangalore and it plans to introduce it at all major locations in the
country beginning with the southern market. The idea of this format is to
grow the modular kitchen business.
Even before the launch, TTK had 150 orders for modular units. In the
current year, the company hopes to achieve a turnover of only Rs 4
crore from these initiatives. For the next year though, it expects this
format to clock a turnover of over Rs 25 crore and three-digit growth
thereafter. With the increase in economic & realty boom, the market is
ripe for such Kitchens Boutique and this will lay a platform for the
company to go to the next level of growth.

Untapped potential in rural India –


There is a lot of untapped potential in rural India and more focus on penetrating this market will
augur well for organized player such as TTK Prestige. According to industry sources, 90% of urban
India already owns a pressure cooker whilst barely 22% of rural India owns a pressure cooker. The
demand from urban India will be predominantly from upgrading whereas additional pressure
cookers and emergence of new households is the great opportunity in rural India.
TTK Prestige has formed a new business model to tap this market wherein the outlet will stock
other TTK products as well in addition to the kitchenware range. The business model is unique as it
involves NGOs and self-help groups. The initial investment will be by the company while the
management will be by NGOs. The company hopes to boost its revenues from the rural market with
the help of this model.

New product launches de-risking its business model –


In the last five years, the Company's Prestige brand has
successfully extended beyond Pressure Cookers, to cover a wide
range of products like Cookware, Gas Stoves, Domestic Kitchen
Electrical Appliances, etc. Its product range has increased
significantly to include over 400 products in 16 categories, and
TTK Prestige is now “a total kitchen solutions brand.”
It has been able to de-risk itself from being a single product
Company by this brand extension exercise. This brand
extension has also enabled it to tap new geographies within the
domestic market, with its new products.

US subsidiary Manttra Inc. progressing well -


The Company has transferred its holdings in Manttra Inc. a subsidiary in USA to another entity in
the TTK Group. TTK Prestige Ltd continues to own the brand 'MANTTRA' and will continue to
have trade relationship with Manttra Inc. to service the US market. Manttra has tie up with Wal-
Mart, K-Mart, Fred Meyer, and Target etc, the largest retail stores in US and going forward TTK is
set to explore the export possibility of modular kitchens to them. However, TTK has enough space
in India itself due to the changing taste of Indian housewife's.

Strong Distribution Network –
TTK has the largest distribution system and the largest service system network in India. This helps
them to tap urban, semi-urban and rural markets. It is the only company in the industry to have
exclusive brand outlets and it has presence in all retail formats.

The entire kitchenware industry is worth about Rs 3400
crore. Pressure cookers account for only one sixth of the
market. TTK Prestige is the only player who straddles
the entire kitchen space. Market shares, being category
specific, cannot be estimated. However, TTK roughly
owns about 10% of the entire kitchen space, which is
by far the highest. Different elements in the kitchen
appliances segment are growing between 6% - 20%,
which presents huge potential for players like TTK.
Domestic kitchenware segment has weathered the lull
witnessed in the past few years, and is recording
impressive growth since FY 2004-05. The frontline
players have, despite numerous unorganized players in
the foray, been successful in increasing their market
share by ensuring strong brand recall and expanding
their product range. To capitalize on the growing
demand, the players are strengthening their product
ranges, distribution network, enhancing retail network,
introduce new value added products and variants.
With penetration levels relatively high in urban areas,
significant growth in demand for kitchen appliances like
pressure cookers is expected to come from the rural
segment.
Increasing urbanization and fast-changing
demographics have led to a growing demand for
additional homes, which in turn have increased
demand for kitchen appliances. Shrinking household
sizes due to nuclearisation, coupled with higher
incomes, are expected to drive demand for household
products, including kitchenware.

Modular kitchen is another market, which has not gained much momentum as it has in the
west. In India the construction of the kitchen in a new home generally is aligned with the
construction plan of the home. Now the culture of open kitchen has brought in to focus the
concept of kitchen solution for the home. According to some estimate the modular kitchen
market has the potential demand of Rs 1000 crore.
The recent housing boom coupled with the rising disposable income would bring greater
inclination of the consumers for the kitchen products going forward. The position of the
brand, better service network and good supply chain network will prove to be the
growth drivers of the players.
Forward integration either with existing retail chain or having own retail chain may go
a long way in pushing the demand for the product as it would give a sense of feeling
among the consumers for trust and right addressing. Overall the companies like TTK
Prestige, which are moving to greater value chain of providing complete kitchen
solution rather than merely providing appliances is expected to have a robust time
going forward.

TTK Prestige Ltd.
TTK Prestige Limited, part of the 1100 crore TTK Group, was incorporated in October 1955, and
is India's largest manufacturer and marketer of the most comprehensive range of kitchenware. It has
a varied product portfolio ranging from pressure cookers, non-stick cookware, and gas stoves to
electrical appliances and kitchen tools. TTK pioneered pressure-cooking in the country by first
importing Prestige cookers in 1948. At present, it sells more than 2.5 million Prestige cookers in a
year in India, through strong channel partners. It also pioneered metal spoon friendly non-stick
cookware in India and it is an undisputed leader in this category.
It has two brands namely, Prestige and Manttra. In the last four years, the Company's Prestige brand
has successfully extended beyond Pressure Cookers, to cover a wide range of products like
Cookware, Gas Stoves, Domestic Kitchen Electrical Appliances, etc., and now it is in the process of
consolidating this extension. It has been able to de-risk itself from being a single product Company
by this brand extension exercise. This brand extension has also enabled it to tap new geographies
within the domestic market, with its new products.
Manttra Inc., established in 1995, offers the most comprehensive range of pressure cookers in the
world. Manttra provides the widest range of pressure cookers in the US, and is set to be the leading
pressure cooker brand there. Manttra is available at major retail chains like Wal-Mart, Target,
Kmart, Kohl’s, Rich’s / Lazarus, Burdines, Belk’s, Sears Roebuck, Macy’s and JC Penny, amongst
others.
The company presently has manufacturing set-ups in Hosur, Coimbatore and Uttarnachal. TTK
Prestige is the first kitchenware company in India to receive the ISO 9001 certification and the only
company to have the PED / CE certification by TUV, Germany

Business Model
The company is primarily engaged in manufacturing kitchen
appliances. It has a wide range of product categories namely
Pressure Cookers, Non-stick Cookware, Gas Stoves, Domestic
Kitchen Electric Appliances, Kitchen Knives and Kitchen Tools. It
is among the few companies in the organized sector which has a
range of kitchen appliances, including pressure cookers, gas
stoves, non-stick cookware, and atta kneaders. The unorganized
segment controls over 50% of the market for kitchen appliances.
Its product range has increased significantly to include over 400
products in 16 categories, and TTK Prestige is now “a total kitchen
solutions brand.”
The company made a foray into retailing in 2003 when it launched
exclusive showrooms called Prestige Smart Kitchens. It now has
173 such showrooms across the country, providing every kitchen
appliance that the Indian housewife needs to set up her kitchen. To
grow its kitchenware product line, Prestige made the decision to
sell hobs (cook tops), kitchen ventilation, and Western-style
‘modular kitchen’ accessories.