Chemplast Sanmar: As Interesting as it can Get

Being in company of logical and rational people makes life pretty boring!!!
We need some logically challenging, brain dead, System-1 dependent people to make life funny and interesting. (For details for System-1 and System-2 and their workings, Read this.

Delisting cases are a perfect example of this theory at work. Give the powers of delisting to rational and logical institutional investors (These guys are also not absolutely rational but are more rational than retail investors) and you will come across pretty boring cases of India Sec, UTV and Patni Comp delisting.

But, try giving the majority of powers to irrational retail investors, you will get Afla Laval and Chemplast Sanmar kinda interesting cases.

Lets talk about Chemplast only as the rest is Past. Promoters announced the intention of buying back 25% of outstanding shares some time back. Now after the tendering process, the discovered price has come out to be Rs 15 per share (All thanks to retail investors). Currently the stock is quoting at only Rs 7.3. So, there is a possibility of 100% gain if promoter group accepts the dicovered price.

Will the promoters accept this price?
I see that as a low probability event. Company is going through a tough time and has been making losses for past 3 years and has high debt also. Offer doc clearly highlights these points.
Though Sanmar group has a number of companies but financial numbers don't look convincing enough for going through the delisting at such a high price.

However, the stock has an all-time high of 22/-. So if promoters think that the business will improve, they should go through the delisting.

Lets see what happens. I am gonna watch only from the sidelines. 

Short Term Stock Pick- 531795

Some Unique Disclaimers first-

• Forgive me Warren for having holding period of some part of my portfolio as Less than Forever!!
• I love mid & small caps because of the inefficiencies that exist in these markets. Its tough to find similar inefficiencies in the large caps.  

So, here it goes............
Atul Auto is a 3-wheeler manufacturer. It submitted an important announcement to BSE regarding Q4 performance here. Company has sold 7457 vehicles in Q4, a 26% increase YoY. Lets do some analysis to see expected numbers for Q4.

	4Q11	1Q12	2Q12	3Q12	4Q12E
					Worst	Best	Expected
3-wheelers Sold	5927	5583	6794	7166	7457	7457	7457
q-on-q growth			21.7%	5.5%	4.1%
y-on-y growth					25.8%
Revenues (in Crs)	63.72	60.98	75.26	79.68	82.92	83.23	82.92
per unit (in lakhs)	1.08	1.09	1.11	1.11	1.11	1.12	1.11
increase			1.4%	0.4%	0.0%	0.4%	0%
Net Profit (in Crs)	1.88	3.29	5.06	3.09	2.45	5.60	3.22
Margin	3.0%	5.4%	6.7%	3.9%	3.0%	6.7%	3.9%
				YoY	31%	198%	71%
EPS	3.21	5.62	7.41	4.32	3.24	7.41	4.26
				YoY	1%	131%	33%

So, in short, I am expecting a 33% growth in EPS & 70% growth in net profit, which makes it a good short term opportunity. So, a 10%-15% jump after the results along with 3.5-4.5% dividend is a very likely scenario (Because 6 P/E stocks are expected to post drop in EPS and not growth).

FAQs 

• Market has ignored the good sales numbers announcement. Why will it react to good EPS announcement?

A- Its not certain that it will surely react. But, I believe, there are enough lazy participants who just make their decisions on YoY EPS growth & I am expecting them to react.

• In the worst case scenario, we are getting no growth in EPS. How likely is that possibility or even worse, a drop in EPS?

A- I see that as a less likely scenario.

• What if market crashes before the result or EPS is not that good or stock stays at same price even after the result?

A- In that case, you will end up holding a debt free company with a decent dividend yield having a top-line growth of 40% and available at 6 P/E. Not that bad as a long term pick either!!!!

HEADS I WIN, TAILS I DON'T LOSE!!!

Am I missing something?