Special Situation - Fresenius Kabi

Whenever I see special situations, I ask myself 'Why bother'?? I am stress-freely enjoying plain simple equity plays & CAD is at two year low & QE is continuing in US & so India should do well.

Then I recall words from Prof Bakshi in some article- "Special situations should be treated as an alternative to cash. And I increase my allocation to these plays whenever I find equity markets over-valued."

If that's the case, with 20.5K on the board & within inches of ALL TIME HIGH at a time when GDP growth is terrible, this is a good time for Special Situations.
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Fresenius Kabi Oncology Ltd is a subsidiary of a Singapore based multi-million Euro company. Promoters have decided to delist the Indian company & have received all the necessary approvals. Tendering will start in another 3 days. For success, 9.5% of total shares need to be tendered out of 19% total non-promoter shares. Lets try to answer 3-4 most important questions in this case.

WILL THE TENDERING SUCCEED?
Highly likely.

• 6.5% shares are with just 4 FIIs.
• Next 3% shares are with 24 FIIs/ Banks/ MFs as per the last available shareholding pattern. 

So, the cards are clear to everyone- who needs to tender to make this a success!! Unlike, cases when whole  25% is with retail guys- who all keep thinking that let others tender... Why should I tender. 

WILL PROMOTERS ACCEPT THE DISCOVERED PRICE??
Highly Likely.

• Only the global entity is listed. All other country entities are not listed.
• Company has raised & won appeals against SEBI over de-listing. So, would be desperate to get de-listed.

So, case of Deprival Super-reaction Syndrome & Commitment & Consistency Bias should make them accept even at a price higher than what they think is justified.

WHAT WILL BE THE PRICE???

• Floor price decided by SEBI formula is Rs 116/-
• Promoters have indicated Rs 130/- as indicative price at which they will accept.
• They indicated this price on April 16, 2013 when Euro was 71 Rs. Now, its 82 Rs. So, this 15% depreciation should make them ready to pay 15% extra on 130/- promised. That's about 150/- Rs.

• BUT those FIIs which hold the controlling power were all issued shares at Rs 80 in Dec 2012. So all of them are sitting on huge profits. So, they may not tender at such high prices.
• FIIs may be operating on Promoters' guidelines. This can be a BIG plan- I give shares to you at 80 Rs; you give me back at 120 one year later. 

• Even if this whole game is pre-decided, I don't think they would like discovered price to be very near to floor price just to avoid facing SEBI's wrath again.

So, there are various angles which makes this case interesting to watch, even if you can't see the whole picture.

My prediction is that Delisting is going to be successful at price of  Rs 140-150.

That's a cool 10% upside in less than 1 month.

Less favorable case would be successful delisting at Rs 130. That's no profit- no loss.

Worst outcome would be delisting failure. High Unlikely. But if that happens, stock may fall 20-30%.

Let The Game Begin!!!

Disclosure- Playing but not heavily. Need to build more conviction on these to play heavily.

Repco AGM

Attended my first AGM this friday- Repco Home Finance.

Key takeaways-

• Dependence on Repco bank is coming down & will decrease going forward.
• Cost of funds may go up soon, but company has the ability to pass it on to the customers. It would have been problem if only Repco had to pass it on. All HFC including LIC & Gruh have increased their rates a week or two back. Repco may do that, if needed.
• Rating upgrade won't help much as it is still getting loans at Base rates from Banks. Cost can't go below base rate.
• They plan to increase provisions going forward. Will take PCR to 70-80% in the long run.
• Repco rate is lesser than Gruh. So that may benefit Repco in areas where Gruh is stronger.
• For credit appraisal, they sit with the customers & work out the customer's P&L and balance sheet. Loan to Asset Value is 65% & EMI to income is 50%.
• NHB has come up with a lot of regulations so the component of NHB funding has gone down. They want to maintain that and NHB regulations will not let them do that. They evaluate the situation and then decide on what funding source to use. NHB funding may even go down to 25% if they decide so.
• Real-estate slowdown isn't affecting them (in the 5 months this yr till now) due to customer profile & focus on Tier-II,III cities.
• The response to new branches has been good. In Tamil Nadu, they don't have to worry about getting new customers as the company's brand is quite strong. They open the new branches at locations that are not too far away from an existing branch. That's the reason they have not ventured into UP and Bihar for instance. They opened a branch in Pune and Pimpri where the NPAs are zero. They will slowly expand in Maharashtra.
• They took approval for max loan limit of 10,000 crs.. planning to reach that level in 3-4 years.
• Their target is to have a 3% spread and 4% NIM
• Planning to maintain historical rates of growth.

Overall, I feel they should be able to grow at 25% for next few years due to limited competition & customer profile & low housing loan penetration. The most important RISK remains Possibility of Bad Debts & losses on account of that.   

Some Short Term Picks

Graham would turn in his grave after reading this. Buffett would also be disappointed. But my investing style seems to be getting more and more inclined to Lynch....

Markets respond to Earnings and the rest is just commentary! 

Asset plays are not making much sense to me anymore. Every night I see Anant Raj promoters buying from open market but I just fail to convince myself to follow them the next day.

So, let me try to pick a few stocks which look good for short term (2 months to 2 years) based on earnings growth. Turaga says you can't do this consistently... If you do it for 10 yrs, I will give you all my funds & will retire. May be I will fail, but anyways lets try-

• Canfin Homes- Housing finance company selling at 5 PE, 0.7 PB with nil NNPA having grown loan book 50% last year. This year EPS should grow at least 25-30% (even after assuming some margin contraction) due to last year's loan book growth. Company is growing well this year also. Return Expectation- 60-80% in 2 years.

Now the tougher question- Canfin or Repco?
My last post said buy Repco. Now I say Canfin. So what's better? Canfin or Repco? Here is the answer-

		Repco	Canfin
	Price	280	140
	EPS	13	26
	P/E	21.7	5.4
	Book per share	102	192
	P/B	2.7	0.7
	Loan Book Growth	26%	50%

Based on this data, I expect Canfin to outperform Repco in next 2 years; though due to higher ROE & no need of capital, Repco should always trade at higher PE- PB to Canfin.

• Navneet Pub- Navneet publishes educational syllabus book majorly in Gujarat & Maharashtra. Now the story here is syllabus has changed in both these states because of which Navneet's competition (its old books) is gone. Because of this, Navneet should have a good 2014. Expected return= 30-35% in 1 year. 

• Mirza Int- Produces and sells shoes majorly into UK. INR depreciation & subdued 1h13 should help Mirza in showing good growth in 1h14. And 5 PE should make market tensed & take this higher.  Expected return= 20% in 6 months 

• Atul Auto- Expecting good 1Q results due to margin expansion. Revenue numbers are easy to project for Atul because they give Auto sales number every month. Now company has done some cost cutting exercise after 1q13 and hence 1q14 PAT should be atleast 35% higher than 1q13 PAT, Revenues will be 15% higher. Expected Return= 15% in 2 months.

And on the Reverse side-

• Repco Home- Had an amazing run after 4q13 results.. A guy on Moneycontrol sums the expected situation in Repco correctly... Copying him- "Following are the drivers in near term.
  Improvement in credit rating (so cost of fund will come down).
  Meet the priority sector lending regulations. (Cost of fund will come down).
  The NPA is steadily coming down. (will lead to better valuation).
  IPO money is available for disbursement : So no equity dilution ((QIP) required in near term. higher EPS."

Now credit rating is still the same. No improvement here. But look at Page-20 of this ppt. NPAs are seasonal and hence should increase in 1q numbers. Hence, provisions will also be higher & 1q PAT should be lower than 4q13 PAT, in my view. Market may not like that and stock may correct a bit given huge run it has shown till now (It would be a good point to enter Repco then if your horizon is more than a few quarters). So, Repco is a Reduce till either unexpectedly good results or expected results and some fall then.

Enough of predictions for today!! Lets end this with a quote from John Galbraith- 

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

Let see the results of these forecasts!!

Repco: A Possible Multibagger?

Value Investors avoid IPOs saying Its Probably Overpriced. But when Repco Home Finance came out with its IPO, it immediately caught my eye.... Maybe because of Representative Bias (similar business to Gruh Finance, a huge wealth creator) or because of Authority Bias. Or maybe because of superb business fundamentals & great past record.

But to build a solid conviction, good performance after IPO was a must. And Repco has delivered exactly what the doctor ordered.

Repco is in the business of housing finance. What separates it from other housing finance comps & banks is its Tier-II & Tier -III focus, Small average loan size (<10 lakhs) & loans to non-salaried class.

If you are holding for Long Term, what's more important is how the business will look in the future than what is looking right now!!!

Based on this logic, I tried to project how Repco will look after FY2017-18... i.e 5 years down the line. Here is my take-

	2013	2018
Equity	634	1200
Debt	3158	9749
Good Assets	3514	10721
NPA	36	108
Cash	210	67
Other Assets	32	52
NII	125	375
Other Income	15	24
Provisions	9	16
Cost	24	66
PBT	107	318
Tax	27	79
PAT	80	238

Assumptions- 25% annual disbursements growth, 20% annual repayments growth, NIM of 3.5%, Div Payout of 15%, Gross NPA at 1%, Tax rate of 25%.

Facts underlying the assumptions-

• There is Huge Demand for housing loans especially from Tier-II & Tier-III cities and especially from non-salaried class due to under penetration.
• Repco can Supply its product (loan) to meet this demand due to good Capital Adequacy Ratio having raised capital from IPO.
• The segment is Niche & there is limited competition due to small loan size, non-salaried customers.

Aggressive Assumptions? 

The assumptions that I have taken are conservative, IMHO. 

• Assumed 25% disbursements growth while comp has been growing at 40% historically.
• Assumed NIM of 3.5% while it was 3.9% last year & should improve as Repco's debt rating improves.
• Company's NPA has only been notional till now, it has hardly lost money as bad debt to customers.  

On a PAT of 240 crs & Book Value of 1200 crs, Repco can trade at 3600 crs Mcap {15 times PE & 3 times PB}...
A cool 3 bagger in 5 yrs time.. with a CAGR of 22%.

Risks-

• Rash Lending- With so much cash at disposal, company can go into imprudent lending, resulting into bad debts & hence losses, which may hurt the shareholders.
• Slowdown in Home Purchases- Any slowdown in real estate activities can hurt the company.

The Most Important Thing: Learning from Buffett & Sachin

Ahh... what a catchy headline, you would say !!!
What's common between Buffett & Sachin & what is the most important thing that can be derived from that similarity, some others would wonder!!!

So, let me try to answer this. But first a few questions-

Who is the World's Best Batsman?
All sort of people will have different answers but most will say Sachin is the best.

The next question is for only those who say Sachin-
Why? His average is not the highest, his highest score is also not the highest in the world, his lowest score is also not the lowest either. So why Sachin?

Before you answer, here is another one-

Who is the World's best Investor?
There would be some arguments on this one also, but lesser than Sachin. Mostly will say Buffett.

The next question is for only those who say Buffett-
Why? His CAGR average (19.7% CAGR) is not the highest, his annual highest (59.3% in 1976) is also not the highest in the world {Even yours truly boasts of a better highest annual score than the world's best investor :-)}, his lowest annual (-9.6% in 2008) is also not the lowest either. So why Buffett?

The answer is because Sachin has the Highest runs, Max centuries, Max MOM.
And Buffett has the maximum growth of capital (some 586817%).

So, the common reason to both the WHY is Longevity; Durability; Time in the Game. If you haven't spend enough time in the game, you can't be Great. You may be a possible great, but to be a proven great you need to have decades of experience.

So, there can be neither 20 years old Sachin nor 20 years old Buffett.

And so this is the most important thing- The Longevity, The Time in the Game.

Also, you should be Good to succeed. Look at Sachin's technique & Buffett's process.
Too much of a good thing can be wonderful & too much of a bad thing can be disastrous.

So do a lot of something but do it WELL.
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Now a tough one- If you have to choose between being Sachin or Buffett, what would you pick?

Before answering, look at Sachin. Poor guy has been slightly out of form recently & had to retire because of that.
Now look at Buffett. He has underperformed S&P 3 times in last 4 years (This has happened only 9 times in 48 years). For the first time, he is expected to give a 5-year underperformance to S&P.
Still Nobody is asking for his Retirement!!!

So my vote goes to Buffett. What's your choice?


 

I'm Lovin' It

If you haven't followed Markets closely this year, then you would only know that Nifty is a bit down in 2013. You would have missed the entire story that the following pic says-

Yes, there has been a carnage (ok one-third carnage) in Mid Caps & Small Caps.
A lot of stocks are down more than 20% this year without any conclusive reason.

Is this fall justified?
Some will say Yes.... Mid Caps & Small Caps are more risky. And even after this fall, they are commanding higher PEs than Sensex & Nifty.
Some will say No... since Mid & Small Caps provide better growth opportunities.

My Take?
I don't know whether the fall is justified or not.
However, I know that market is throwing out the baby with the bath water. Some stocks deserve the fall that they are getting but not all. This flight to safety is giving a good chance to accumulate some high quality mid & small & micro & nano caps.

A number of stocks are now offering more than half of FD retuns & are priced at such a valuation which assumes that they will either go out of business soon or their earnings will fall big time & will never recover from there!!!

MacD's punchline comes to mind- "I'm Lovin' It"

 

My Watchlist

So, we are at 20K again.
A lot of stocks are making lifetime highs and are selling at high multiples.
Gone are the days when you could find Mayur, Amara Raja, Cera, RS Software, Ajanta Pharma at prices at which you get the growth for free.

Life is tough these days if you are a Value Investor!!!

However, there are some stocks which haven't moved in past 1 year due to some temporary issues but are good business to own in the long run. I believe its worth looking at them when the issue is there rather than after the issue is solved & the stock price has moved up.

So, here are two of them-

1) GRP Ltd- GRP is the largest reclaim rubber manufacturer in Asia & third largest in the world. It has done exceedingly well with

5 Years Sales CAGR : 22.67% &  5 Years Profit CAGR: 21.55% with 30+ ROE.

http://www.screener.in/company/?q=509152

 

Last 3-4 quarters haven't been good due to increase in raw material costs & capex plans. However, this is giving a good opportunity to enter.

 

2) DFM Foods- DFM is an FMCG company into snack food manufacturing. Crax & Natkhat brands belong to DFM.

5 Years Sales CAGR : 33.67% & 5 Years Profit CAGR: 84.41% with 30+ ROE.

http://www.screener.in/company/?q=519588

 

Last 3-4 quarters haven't been good due to expansion outside Northern India & capex and debt associated with it. However, this is giving a good opportunity to enter.

 

P.S- Please do your own due diligence. Also I am expecting recent quarterly results to be bad & stocks may correct a bit from current prices.