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November 25, 2012

Indsil Hydro Important update

Note : SOLD ALL Holding  Dec 2014 with avg price of 44
There are lot of things happen for Indsil Hydro , there are few positive news which likely to make Indsil Hydro mulitbagger from the current level of around Rs 29 but same time there are few negative as well . I will start with the negative .

Negative News :

               Quarterly Result : - Indsil Hydro posted quite a bad quarterly result for Sep12 . Profit was only 0.15 Crores against 2.2 crores . The main culprit was increased power expenditure and lower price realizations.
               Renewable Energy Certificates : Earlier , I had covered REC aspect of this company but It looks like the REC market is in coma for non-solar .REC certificates for non-solar are trading at the floor price . Last month buy order were 1.32 lakhs REC against 8.51 lakhs REC available for sell .Currently REC mechanism is going through a low-enforcement scenario , we can just hope for a better future . I hope the ministry of renewable energy will raise the issue at appropriate forum and try to solve it . Last 3 months of the financial year will see some action again. By the way , one ray of hope on enforcement came from a Rajasthan HC decision in case of (Companies including Ambuja Cements, Shree Cement, DCM Shriram Consolidated and Grasim Industries ) , as per path breaking order “Captive, Open Access users liable to pay RPO penalties: Rajasthan HC” Get Detail . But the bad news is that they may challenge it in supreme court.

Positive News :-

               Positive news came from the latest annual report for FY11-12 which you might have received in your email 3-4 days back If you are existing investor , else you can access from Value2wealth Google Drive (View Annual Report). When I last check it was not available on BSE site.
               JV Project in Oman Status :        
               The company has provided following update on JV Project in Oman
“As reported in the last year's Directors Report, the JV Project in Oman (Al-Tamman Indsil Ferro Chrome LLC) established in the Sohar Free Zone in Sultanate of Oman is building a world-class Ferro Chrome Smelter with an initial capacity to produce 75,000 tpy at a cost of USD 35 Million. Most of the civil work have been completed. Equipment installation work had commenced and it is expected that the
1st furnace of the project would be commissioned by early March, 2013. The 2nd furnace will follow within 4-6 weeks after 1st commissioning of the 1st furnace. Thus, the plant is expected to be fully operational with a capacity of 75,000 tpy of ferrochrome by April 2013.”

So , wait of the last few years is going to end in the next few months . Of course , profitability will depend on price realization.

Consolidated Account :
Project status is big update but I get biggest news when the company said they are going including results of AL-TAMMAN INDSIL FERRO CHROME LLC in the consolidated account result. This is most important because initially I had not given much weightage to this project since investment could have gotten locked and It could have been realized only by getting some dividend or selling stake . But this statement changes the picture quite nicely for the company .

The followings are auditor comments regarding this consolidation , which are important , since we generally see consolidation of account when stake is at least 50% .

Interests in Joint Venture have been accounted by using the proportionate consolidation method as per Accounting Standard (AS) 27 - " Joint Ventures".

Investments other than in subsidiaries and Joint Venture have been accounted as per Accounting Standard 13 on Accounting for Investments.

We report that the consolidated financial statements have been prepared by the Company's management in accordance with the requirements of the Accounting standards ( AS 21) " Consolidated Financial Statements "& Accounting Standard (AS) 27 - "Financial Reporting for Interests in Joint Ventures" as notified pursuant to the Companies ( Accounting Standards ) Rules 2006 and on the basis of separate financial statements of INDSIL Hydro Power and Manganese Limited and its subsidiaries.

Royalty :
               This news is ice on the cake .

               The Company's investment in the Oman JV project to produce ferro chrome will start paying dividends from the middle of next calendar year (2013). The income stream will be in the form of royalties per ton of ferro chrome produced as well as dividends, if any, from the profits accrued. Subject to the success of the first phase of the ferro chrome project, your Company plans further investments in the JV to potentially double capacity of the ferro chrome smelter.

               Please note Indsil Hydro will get royalties on per ton produced , not on the PAT . We rarely see Indian company get royalties from foreign partners . Managing Director Vinod Narsiman is B.E., MBA (University of Michigan) . Did he play a role in getting this great deal in the JV?

Number Game :
               If this JV project gets success then it will be game changing for the Indsil Hydro in coming years . Again , number are unbelievable for this small cap company if both phases get successful . I played with the numbers which will be true depend on  rate and capacity utilization.  I can play with numbers and predict revenue but can’t predict PAT from JV .
               Current rate for ferro chrome is 2420 USD / ton , which is around rock bottom and 5 year high around 6300 USD/ton. (Refer 5 year Rates  , KPMG Report , Steelguru report  )

                      Capacity Utilization of 75000 TPA Capacity
Capacity Utilization of 1,50,000 TPA Capacity


INR in cr @55



INR in cr @55



INR in cr @55


Note : If you find something wrong in my calculation then please let me know at .

If both phases get successful then Indsil Hydro can have 5-15 times more revenue from current revenue of almost 70 crores , which can vary on world economic scenario and ferro chrome prices . I can’t predict  what will be Net Profit Margin it can be 5 or even 15-20% or may be even negative . On top of this company will receive royalties on tonne produced . They have not mentioned exact rate in the annual report .

Multibagger Formula for Indsil Hydro :-
                     There are at least 8-10 factors which will decide whether it will become 5x in next 5 year or not . I tried to put it in a formula as an experiment you can put your own weightages.

Here Fields Are 

               CG  : Corporate governance satisfaction factor score ( possible values binary either 1 or 0 )
All following score can have values from 0-10 .
               F1 :  Indian both smelter performance factor score .
               F2 : 21 MW Hydro power performance factor score .
               F3 : Oman JV project Phase-I factor score.
  F4: Oman JV project Phase-I factor score.
               F5: Royalty Rates for Oman JV project score .
               F6 : REC Market condition Score
               F7: Indian Stock Market sentiments, especially for small cap.
               F8: Favourable Ferro Chrome Price Score

The Oman JV project does not look factor-in in the current market price of 29 (market cap 44) . You have 3 choices either skip this stock idea , start analysing it or wait till real impact of the Oman JV project start getting in the results . Please also not that share of Indsil Hydro currently available  with around 4% cash back ( Rs 1 , Ex dividend on 10 Dec) .

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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a financial adviser . 

October 21, 2012

Sah Petroleums Ltd : A Safe Delisting Play

Note : SOLD ALL Holding  Dec 2015 with avg price of 80 ( equivalent after bonus share to non promoter = 177 against discussed price of 27 )      
   The government had stipulated that by June 2012 all listed companies should have at least 25% public shareholding, which means promoters should not hold more than 75% in these companies. We are now in the critical final months required for a promoter's decision. So , all the delisting candidates are trading on huge premiums specially MNC because of strong parent companies . As per times of India Article  Click Here "The candidates' P/B (price-to-book value) is 2.9x, have a P/E (price-to-earnings) of 32.3x and an EBITDA (earnings before interest, taxes, depreciations and amortization, or popularly gross profit) multiple of 14.2x, all well above the broad market,"

        So , I decided to find bargain hunting bet in delisting candidates. I used a filter on “EV to EBITA” instead of usual PE for finding still cheap bets. I came across following list.

Promoter Shareholding (%)
Surat Textile Mills Ltd
Rama Phosphates Ltd
Sah Petroleums Ltd
Madras Fertilizers Ltd

           I zeroed on “Sah Petroleums Ltd”  due to various reasons including almost zero debt , high promoter holding , foreign  quality promoters , turnaround candidate , low dirt cheap valuation and visibility of IPOL brand .

Sah Petroleums Ltd Background :
                  Sah Petroleums Ltd is one of the leading manufacturers of industrial lubricants in India. The company manufactures wide range of industrial and automotive lubricants, specialties and process oils under the brand name of IPOL. Their manufacturing facilities are located at Thane in Maharashtra and Nani Daman in Daman & Diu. The company has one of the largest in-house storage farms in the private sector in India for storing oils sourced from all over the world. They also all India sales and service network operating from their offices / depots / CFAs located in Mumbai, Pune, Vadodara, Indore, Jabalpur, Jaipur, Delhi, Ghaziabad, Faridabad, Kaithal, Chandigarh, Patiala, Kolkata, Jamshedpur, Hyderabad, Bangalore and Chennai. Their products are exported to Sri Lanka, UAE, Kenya, Chile, Argentina, Malaysia and Indonesia. The company`s product categories include automotive lubricants, including automotive oils, automotive greases and automotive speciality oils; industrial lubricants, including industrial oils, industrial greases, metal working products and industrial speciality oils; process oils, including rubber process oils and secondary plasticiser for thermoplastics, elastomers and plastics; transformer oils, and white oils.

Prima facie name of the company looks like an Indian company but majority stake is held by foreign investors (Navis Capital Partners)

Navis Capital Partners holds majority stake around 62% , while Indian promoters hold around 25 % .

Navis Capital Partners Background:

               Navis is one of the longest standing private equity groups in South and Southeast Asia. The firm manages several private and public equity funds totalling USD 3 billion, and whose investors include a number of well-known US, European, Middle Eastern and Asian commercial and investment banks, pension funds, insurance companies, corporations, foundations, as well as a number of high net worth individuals and family offices. Navis has one of the largest private equity professional team in Asia, comprising 60 individuals, supported by 30 administrative staff, in seven offices across the region.
Click here for getting complete portfolio details of Navis Capital Partners.  The Navis Asia Navigator Fund has outperformed 92% of its peers in the past three years (Source ) .

Open Offer History :
               The Navis Capital Partners fund has acquired stake in the Sah Petroleums Ltd through three steps - open offer (20%), preferential allotment of shares (27.3%) and the rest through acquiring the promoter’s stake in year 2008. Under the preferential allotment of shares, the fund had bought 12 million shares of Sah Petroleums at a price of Rs 26.65 per equity share, an aggregate sum of Rs 32 crore. 
The open offer for the company was for a 27.5% stake (20% of diluted capital), in which Navis had offered Rs 48.5 per share. The share price of Sah Petroleums was trading around Rs 8 before the announcement of preferential allotment of shares, and Navis had paid more than triple of that and open offer price was almost 6 times. ( Source).  G. Maran, ED, Unifi Capital declared this open offer as their most profitable offer for his company. ( Source)

Chances of delisting of Sah Petroleums :
               Sah Petroleums Ltd is run by Indian promoter but majority control is held on by foreigner promoters that is Navis Capital Partners . Foreign promoter has a strong background so if they choose to delist then that will not be a major issue for them. There are few obvious advantages for them to go for delisting instead of reducing stake. There is always less headache to sell un listed company than listed one since this fund is not going to hold Sah Petroleums Ltd for forever.  I am not sure about Indian promoters but the foreign promoter of Sah Petroleums Ltd will be benefited by choosing delisting option. Most of their portfolio is from unlisted space.  SEBI has provided following route to reduce stake.
a.       Issue bonus shares or rights issues in which promoters will not be allowed to participate
b.     Offer for sale (OFS) 
c.      Institutional placement programme (IPP) 
I don’t think promoter will dilute stake by bonus or right issue and even if they choose OFS then that should be quite high to current price because they have brought @ 48 through an open offer that too 4 years back.
            Delisting case of Sah Petroleums Ltd is quite similar to Thomas Cook (India) Ltd (Both acquired by fund, has around 87% promoters holding etc.)  except to  Thomas Cook (India) cannot delist because “The acquirer, whose shareholding exceeds 75% pursuant to an open offer, cannot make a voluntary delisting offer under the SEBI Delisting Regulations, for one year from the date of completion of open offer.” This is well explained by Kiran ( Most improved value investing blogger in recent past)  Article
               Thomas Cook (India) Ltd is trading with premium (EV to EBITDA 10.7) and just below the open offer of 65.48 even though there is uncertainty of eligibility for delisting. If there is certainty emerge then It can rally from current price. However , Sah Petroleums Ltd is just trading on  EV/ EBITDA of just 2.8 .
 Most of the delisting candidate companies are expecting June 2013 timelines to be further extended but in recently Sebi chairman UK Sinha warned those companies. Read

What if no delisting?
              If we leave delisting aspect aside , then also Sah Petroleums Ltd is very good candidate for turnaround .
               How can it turnaround?
                              Every year topline of the company is growing but the bottom line is quite inconsistent.  This is mainly due to fluctuation in crude oil prices and currency. This issue is quite visible in other companies of the same sector except few excellently manage companies like Castrol.
                              Last year Sah Petroleums Ltd has shown PAT of just 6 lakh but Profit before “Interest, Depreciation & Tax” was around 31 crores. The PAT was down because of “Interest & Financial Charges” of 28.15 crores. If a company has debt of only 1.54 crores then how come “Interest & Financial Charges” of 28.15 crores ? To get the answer refer following screen shot from the annual report.

Sah Petroleums Ltd had lost around 21 crores on currency trading, few crores of bank charges and some interest expenses (not for company debt but it is for “Acceptances” / derivatives).
This 28.1 crores was for the whole year but in Q1FY13 it has 14.41 crores only in single quarter.



Whenever INR will become strong or stabilize then Sah Petroleums Ltd will start to perform better on bottom line front. We have seen some gain and stabilization in INR from last one month. So, I believe the turnaround in the bottom line is around the corner.

No delisting , NO immediate turnaround then ?
               Apart from delisting and turnaround it also good candidate for Value buy or Value Trading (Term introduced by Rohit Chauhan Read )
               Sah Petroleums Ltd is trading around Rs 27 and mcap is around 120 crores. The company does have cash of around 30 crores and investments in short term MF of around 45 crores and negligible debt of 1.54 crores. So effective if we do not give any discount to investment value then the company is only available for 120-30-45 = 45 crores. Sah Petroleums Ltd is effectively available only for 45 crores against last year PBITD of 30.80 crores and sales of around 550 crores. Doesn’t it dirt cheap? I agree company shows inconsistent bottom line and don’t deserve high valuation. But current valuation is dirt cheap and that too when promoter (Navis Capital Partners) is a financially strong multinational company (private equity player) with a good history.
               Apart from this company have brand IPOL which is known as value for money. When I visited a few shops in Pune I can see availability of IPOL Lubricants as per dealers it is not in the top 3 selling brand for them but it is definitely value for money. Who knows, one day Salman Khan starts endorsing IPOL brand and his fans start using it J.
                The Company has a marketing network setup all over India. The company markets its products through its sales offices / depots located at Pune, Delhi, Faridabad, Chandigarh, Chennai, Bangalore, Hyderabad, Baroda, Kolkata, Jamshedpur, Jaipur, Indore, Mehsana, Jabalpur, Patiala, Gaziabad and many Clearing & Forwarding Agents at different locations in India.

Concern :
               Last year company imported around 286 crores of raw material and had sell export of 210 crores. If I get some platform then I would like to ask why they need so much currency trading / hedging ? May be because of some balance sheet items like Sundry Debtors, “Loans and Advances” and “trade payables” etc.  Secondly , Debtors ratio of 4.62 is a bit lower than my comfort level ( >5 ) ,but it is constantly improving every year.Another concern I have already mentioned is steady top line growth but inconsistent bottom line.

My Course of Action :
1.     If the promoter of Sah Petroleums Ltd chooses to go for delisting and it gets successful then I can easily make minimum 80 to 100 % . I apologize for speculation on expected return , but do you think that is impossible?
2.     If promoter dilutes stake above market price and rally comes then I will decide on my exit plan.
3.      This is good company available for dirt cheap price, but I may not prefer to invest in this stock with a time frame of more than 2 years. There are lots of other quality small /mid cap companies available in the market for long term investments. I will wait around 2 years max for turnaround or value realization. If no turnaround occurs in the next 2 years then I will exit from this counter and invest in some other safe bet (Mr . Market has every right to prove that too unsafe J)

I believe this stock pick is a type of 

·       Bargain value pick with margin of safety and catalysts (Delist / Turnaround) -- Seth A. Klarman
·       "Head I win (Delisting/Turnaround); tail I don't lose much. (Due to Dirt cheap valuation, brand, promoter quality)" -- Mohnish Pabrai.

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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a financial adviser . 


I am not an Investment advisor and do not provide this service via this Blog. The Blog is a personal diary and the stocks discussed on the blog represent my personal views and analysis. They are not recommendations to buy or sell stocks. I do not intend to recommend any stocks for financial or non-financial gains and may or may not be holding the stocks discussed on my blog.

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