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Wednesday, August 5, 2009

Small Cap Stock Analysis - SEL Manufacturing

Here is one stock which have it's 52 week high of Rs. 757 and low of Rs. 38. It is trading at Rs. 67 currently. So, if the stock goes back to it's 52 week highs again, how much money do you think you can make? More than 10 times!! Before rushing to buy stocks of SEL Manufacturing, won't you like to understand why did this stock crashed so much? And why it didn't participated in the rally after crash in which most of the stocks have recovered to an extent? One of my visitors, Mr. Ramesh Hariharan, had suggested this stock and asked my take on this company. Let's understand if there are any chances for us to make money in this counter?

Company Background:
SEL Manufacturing Company Limited is a vertically integrated textile company that manufactures and exports cotton yarn, combed yarn, knitted fabrics and knitted garments. The Company has production facilities located in Ludhiana in Punjab and Baddi in Himachal Pradesh, India. It manufactures and exports all types of knitted garments and its main products include t-shirts, polo shirts, sweat shirts, boxer shorts and girls top.

The Company operates in four segments: readymade garments, texturized yarn, knitted cloth and cotton yarn. The Company is a 99% partner in the partnership firms, M/s SE Exports and M/s Kudu Industries. During the fiscal year ended March 31, 2008, the Company increased its stake to 99% in M/s Kudu Industries. In July 2009, the Company acquired a majority stake in SEL Textiles Pvt Ltd, thereby making it a subsidiary.

Small Cap Stock Analysis - SEL Manufacturing
Analyzing Results
Company's income and profit has been almost doubling for past 2 years. Net profit had increased 100% in 2008 compared to 2007. In year 2009, despite of slowdown, profit increased 25% (44.85 Crores in F.Y. 2008 and 54.78 Crores in F.Y. 2009)

This growth looks attractive looking at the income and profits, so let's have a look at one of the very important factor responsible for deciding valuations of any stock. EPS. Earnings per share.

2007 : 24.04
2008 : 29.48
2009 : 31.91

EPS is increasing but at the same time equity base is also increasing. Equity base meaning number of shares issued in markets. So Earnings Per Share with respect to profits does not translates into growth similar to profit or earnings growth.

Promoters shareholding also stands at healthy 55.73%.

In last week company has acquired majority stake in SEL Textiles Pvt. Limited, thereby making it a subsidiary.

With the aforesaid acquisition of stake in SEL Textiles Pvt. Limited, the consolidated manufacturing facilities (i. e in Spinning) of SEL Manufacturing Company Limited, including the capacities under implementation under its expansion plans, would increase upto approximate 1.75 Lakh spindles + 1632 rotors for open ended spinning.

The only worrying factor is - SEL Manufacturing has large debt in it's balance sheet. And it is increasing year by year. The interest cost is eating out sizeable pie of profits thereby reducing EPS.

Total Debt:
Mar. 06 : 42.99 Crores
Mar. 07 : 136.94 Croes
Mar. 08 : 325.83 Crores

I could not get access to balance sheet of company for year 2009. So not sure how much debt company has in this year's balance sheet.

Verdict:
Textile as a sector has been in prolonged downturn for past year. Company had growth of ~10% in it's EPS. It is trading at P/E ratio of 2.10. Industry woide P/E ratio for textiles is around 9. I believe the stock did not get re-rated in recent stock market rally because of it's increasing DEBT and overall performance of textile sector.

Even if it manages to keep the same growth rate in EPS for FY 2010, EPS could be around 35. Forward P/E would come below 2 at CMP. From these calculations, stock valuations look much cheaper but stock would get re-rated only if company manages to pay off the DEBT and get rid of huge loans. If you consider the debt amount of 325 Crores, how would the company pay back such huge amount? From profits. To pay off loans of Rs. 325 Crores (this amount could be bigger in this year's balance sheet), SEL Manufacturing will need many years and till that time interest cost and loan repayment would eat out major share of profits.

If one believes in company and business, and is ready to wait for few years, and if company successfully repays it's debts, there are chances that stock could prove multibagger. For short or mid tearm, stock could give 15 - 20% returns. I do not think stock would be able to touch it's highs soon.

Market Cap 115.27
* EPS (TTM) 31.91
* P/E 2.10
* P/C 1.60
* Book Value 159.63
* Price/Book 0.42
Div(%) 10.00
Div Yield(%) 1.49
Market Lot 1.00
Face Value 10.00
Industry P/E 9.83

12 comments:

  1. Hi Vinay,

    Nice report.I have always liked your style of analysis and i am a regular visitor to your blog.

    I would love to see you proposing 2-3 multibaggers that you think are available at cheap valuations now and would participate in market rally goin ahead.

    Keep up the good work.

    Cheers,
    xsprince@live.in

    ReplyDelete
  2. Hi Vinay,

    Nice report.I have always liked your style of analysis and i am a regular visitor to your blog.

    I would love to see you proposing 2-3 multibaggers that you think are available at cheap valuations now and would participate in market rally goin ahead.

    Keep up the good work.

    Cheers,
    xsprince@live.in

    ReplyDelete
  3. Hi Vinay,

    I could figure out that you wrote this analysis almost an year back when share price of SEL was 67 a share. In the last one year, the share price has seen much ups & downs, specially in the last one month or so. Promotors holdings is going down as well. Also company is coming with an IPO in future. I read somewhere that more than 80% of the equity (other than that of promoters) have changed hands past one month!!

    Amidst all this, whats your views now on SEL. I am sure 2010 balance sheet is now available for you to review. I and many small & medium investors are curious to know your view on this.

    Personally, i do not hold any shares of SEL, but definitely planning to acquire some.

    Thank you

    Kapil Madan
    (madan.kapil@gmail.com)

    ReplyDelete
  4. SEL March 2010 Equity - 30.35cr.
    net profit- 7.79cr.
    EPS Qtr - 2
    Promotors holding Mar 08 - 64.5%
    Dec 08 - 57.27%
    Sep 09 - 47.43%
    Mar 10 - 38.67%
    Promotors lagatar apni holding decreas kar raha hai.March 10 quarter ka net proffit March 09 aur Dec 09 ke adhe se bhi kam hai.DEPT ke bare main Vinay Bhai ne bataya hi hai.

    ReplyDelete
  5. Kapil and Devkinandan .... I just had a look at SEL's latest result ... it says that promoters shareholding is now 19.45% (yes ..it is nineteen).

    Result is here: http://www.bseindia.com/xml-data/corpfiling/AttachHis/SEL_Manufacturing_Company_Ltd1_260710_Rst.pdf

    The debt on company was Rs. 623 crores.

    I don't understand Kapil, why do you want to buy it when promoters themselves are selling it ....

    -Vinay

    ReplyDelete
  6. very good report ........thank you very much

    ReplyDelete
  7. Hi Vinay

    Promoters are not selling it . Promoter share is approx 1 crore since begining and equity dilution has meant that promoters have only 19% shares now out of 6 crore total ( as on June 10 ) Now after that company has again gone for GDR of 3.5 crore.
    Hence GDR is approx 68% . Hence it needs to be own as to who is holding the company !

    ReplyDelete
  8. Thanks for talking about dilution. I think that could be another good point. We know that dilution is for expansion and I guess, partly for debt repayment. I am not sure about debt part of it. And debt part is really should be a thing to worry. I have not seen any guidance from promoters on this, so we do not know and have the assurance of how they are going to play with debt.

    Value investing says "high debt is a thing to worry about". If you can put some light on it, you are welcome.

    You may post it as a comment here or mail me : editor at IndianStocksNews dot com

    ReplyDelete
  9. Q4 consolidated net profit was up 237% at Rs 32 crore versus Rs 9.5 crore.
    Its consolidated net sales were up 66% at Rs 481 crore versus Rs 289 crore.

    ReplyDelete
  10. Dear Sir

    I have 1000 Shares @ Rs 36.

    Please guide me as to I should continue holding or exit.

    Many thanks

    ReplyDelete
  11. Hi
    nice analysis
    One other factor to look at it is the cash flow statement of the company. Despite of huge rise in profits, the company's cash from operating activity is negative for the past many years and this is because the company has blocked so much funds in Debtors and inventories and it looks like most of the company's sales have been on credit.


    Regards
    Ellesh

    ReplyDelete

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