Indian Consumption Play : Umang Dairies Ltd

Note : I have sold entire holding in Umang Dairies Ltd to buy Olympia Industries Ltd in July2015 at avg rate of Rs 65 (against my avg price of 27). I feel Olympia Industries is multibagger from this level while Umang Dairies Ltd will give only decent return.

           Being a value investor , I don’t like to invest in leveraged company, When I saw debt equity ratio of  Umang Dairies Ltd as 1.32 , I was going to dump this stock idea but when I dig further I came to know that debt equity ratio of 1.32 is deceptive. It is deceptive because Umang Dairies Ltd was went into BIFR and its book value was negative . Even “Reserves & Surplus” is negative in the balance sheet of Umang Dairies Ltd  for  FY12 . Due to negative “Reserves & Surplus” Total Shareholder’s Funds came to 11.16 crores and debt is 15.62 crores. Last year company has PAT of 13.83 ,If we assume that the company perform same this year and all of this PAT transfer to reserve (trend of earlier years) and company do not take any new debt , then debt equity ratio will be drastically come down to 0.62 (Reserves 11.16+13.83 = 24.99 crores and debt 15.62 crores) and if company perform better , then debt equity ratio will also improve along with that. If we analyze debt in other terms like comparing with PAT then it comes around last year’s PAT .( Debt 15.62 and PAT was 13.83 )

           Umang Dairies Ltd  was incorporated on 2 Dec.'92 by Straw Products and J K Industries by the name of J K Dairy & Foods . Not many people know Umang Dairies Ltd is a JK group of company .  The company was making losses and went into BIFR . BIFR scheme was implemented in 2009 and after BIFR scheme implementation majority stake is acquired by JK group company Bengal & Assam Co Ltd . Bengal & Assam Co Ltd has a stake of 45 % in Umang Dairies Ltd and total promoter holding of JK group is around 75 % .

            It is trading around price of 42 (market cap of 92 cores) .

           Bengal & Assam Co Ltd  promotes few other companies including Fenner (India) Ltd and LVP foods Pvt Ltd.  Promoter JK group (Bengal & Assam Co Ltd) has successfully turnaround Umang Dairies Ltd  to profitable one .  There are only a few companies which get turnaround after BIFR scheme implementation one of them is Symphony Ltd. . There are differences in Umnag dairy and Symphony like the business model of Symphony is superior, attractive return on capital employed and it has all India presence etc. But there are few similarities between them . Umang Dairies Ltd  may not achieve similar heights but it is on the same path of Symphony Ltd.

1.      Both companies have had a financial trouble history , negative book value , negative net worth etc.

2.      Both companies went into BIFR.

3.      Both companies got turnaround after BIFR implementation .

4.      Both companies provided amazing return after BIFR implementation and turnaround .  Symphony Ltd was trading as low as 3 ( around 14.5 before the split)  and currently trading at around 380 . It has given a return of almost 130 times from that low level . Umang Dairies Ltd  also traded at as low as 3 and now trading at 42 . Around 14 times return from low level and may be still some steam is left .

5.      Mr Market took some time to forget about past of Symphony and was giving a PE of single digit for first 3-4 years after the turnaround .  Now it is trading around PE of 25 .  Umang Dairies Ltd  is trading on the low valuation ( PE around 6 ) and would be re rated in future if the company continue good performance for next 3-4 years.

6.      Both are Indian consumption play stories and got turnaround  after BIFR implementation due to rising disposable income of Indian and Indian consumption story.

7.      Promoter holding in both the companies is around 75%.

8.      One time Symphony Ltd also had deceptive debt equity ratio of 2.15 in FY08.  Umang Dairies Ltd  is  now having a deceptive debt equity ratio of 1.32 .

Dairy Industry : Demand for milk based products has outstripped milk production in recent years. Every year , per capita consumptions of milk is increasing in India. Milk production continues to increase by 3.5 to 4% YOY and demand is growing at 5 to 6% YOY. According to NDDB estimates, demand for milk will go up to 172 Mn MT by 2021-22 . Concerned by likely shortage of milk in coming years, Government of India has launched National Dairy Plan (NDP) in 12th 5 Year Plan. It has been formally launched on 19th of April 2012 and envisages an expenditure of Rs.2242 crores. The project aims to increase the productivity of milch animals and provide India’s 70 million small rural milk producers with greater access to the organized milk processing sector.

Comparison with peer :  Umang Dairies Ltd   is available at attractive valuation as compared to its peers.

           

Comparison with Peers
	Kwality Dairy	Hatsun Agro	Umang Dairies	Winner
Sales	1,608.04	1603.54	150.22	Kwality
PE	6.3	25	6.2	Umang
EV/NP	1080.63/45.94 = 23.50	1129.80/25.64=44.06	105.27/13.82=7.61	Umang
ROCE	24.98	34.48	44.95	Umang
Debt/Equity Ratio	4.65	1.04	1.32	Hatsun
Debtor Turnover Ratio	4.78	175.47	50.58	Hatsun
Net Profit Margin	2.86	1.66	9.21	Umang
Promoter Shg. Pledged	6.57	32.49	0	Umang
3 Yr CAGR Sales growth	69.04	16.54	67.21	Kwality
Debt/PAT	424.80/45.94=9.24	108.20/ 25.64=4.21	15.62/13.82=1.13	Umang

Note : - Next year Umang Dairies Ltd expected to have low debt/equity ratio, same time Net Profit Margin of company is going to hit by the tax . The company was loss making so it was not paying taxes on profit , till the accumulated loss crossed accumulated profit . Last year it has carried down P & L Bal of -3.43 crores which will exhaust this year but company can enjoy tax exception on accumulated depreciation against that loss making period , may be around 8-10 cores additional benefit out of total depreciation of 22.54.

Reason of turnaround after BIFR  :-  As per my analysis followings are reason for company’s turnaround after BIFR.

1.      The company was belong to reputed JK group .

2.      Promoter Bengal & Assam Co Ltd  was having the experience of running a dairy business by running company LVP foods Pvt. Ltd.

3.      All most all the companies in consumption sector are seeing an increase in demand from the last few years which played a crucial role , there is mismatch in demand supply of milk based products.

4.      During the FY09-10, Company collaborated with M/s LVP Foods Pvt. Ltd. to put up a facility to process and pack liquid milk in poly pouches and commercial production commenced on September 2009.

5.      Bharti Wal-Mart has contracted to buy Umang Dairies Ltd’s Ghee under their private label "Great Value". Products offered at Walmart through the Great Value brand are claimed to be as good as national brand offerings, but are typically sold at a lower price because of minimal marketing and advertising expense. As a house or generic brand, the Great Value line does not consist of goods produced by Walmart, but is a labelling system for items manufactured and packaged by a number of agricultural and food corporations one of them is Umang dairy .

6.      Mother Dairy Fruit & Vegetables Pvt. Ltd. who is the main party for whom the Company used to do the contract manufacturing job before BIFR. This activity used to last only 1-2 months. Company change that policy.

7.      The Company also increased its focus on the sale of SMP and Butter to institutional buyers.

8.      A Rehabilitation Package was sanctioned by BIFR on 03.08.2009. Most of the long term lenders of the Company were settled and paid off by promoter group companies.

9.      Increase in capacity utilization of plant every year from Sep 09 . Capacity Utilization of Drying Plant improved from 39% in 2010-11 to 55% in 2011-12. Under Contract Manufacturing arrangements Utilization of Liquid Milk Plant increased from 60% in 2010-11 to 87% in 2011-12. As per the company, Capacity Utilization in Liquid Milk Plant will be very close to 100% in 2012-13.

Positive Points :

1.      Umang Dairies Ltd  is available at an attractive valuation and it is backed by JK group. The dairy industry is having lots of potential, Amul targeting to increase its turnover to 30,000 crores by 2020 .Sahara group is also planning to enter into the dairy business . DANONE is also bullish on Indian’ dairy Industry and expanding very quickly and giving strong competition to Nestle.

2.      Balance sheet looks good to compare with peers.

3.      The company does have pricing power and pass increasing in milk price to consumers .Company used  to pass input price hike in the past , but it used to impact volume . But now due to increase in the disposable incomes of the families , I believe the volume will not be decrease that much.

4.      The company does have some brands of milk product .

5.      Umang Dairies Ltd  has received “Supplier of the Year” Award 2011 – Private Brands category from Bharti Wal-Mart , which speak quite well for the company . Expansion by  Bharti Wal-Mart will also help company to grow. I have not visited  Bharti Wal-Mart stores to see available products of Umang Dairies Ltd  , but that will be good exercise . Any volunteer ?

6.      Over the years, the Company has built up a Village Level Collection (VLC) network including Chilling Centers and collects milk from over 300 villages comprising about 12000 farmers twice a day. The milk so collected is not only of better quality but is also cheaper as compared to the milk purchased from the Contractors. It is not an easy task to new entrant competitor to start Village Level Collection of this level.

7.      Gajraula Plant location is only 110 km from Delhi.

8.      Capacity Utilization in Liquid Milk Plant will be very close to 100% in 2012-13 but the scope of increase in capacity utilization of Drying Plant is still there.

9.      The government has banned export milk products since there is mismatch in demand and supply in India. The government in Jun 2012 notified lifting of the ban on exports of skimmed milk powder to improve the finances of dairy firms and help milk producers. This will help company in short term , but lifting and imposing ban on skimmed milk powder is on-going phenomena .

Risk / Concern :-

1.      I have not figured out any red flag in annual reports but any corporate governance issue is the risk which is applicable to all the stocks including HDFC bank and Infosys.

2.      Capacity Utilization in Liquid Milk Plant is going to reach 100% in 2012-13 . What is after that ? What is plan of management ? How they are going to finance expansion ?

3.      Umang Dairies Ltd  may have to pay little or no tax this year ,but from next year they will have to pay tax . It will reduce the figure of PAT , then comparable figure will PBT .

4.      Rainfall is not good this year in India including western UP where the company has a Village Level Collection (VLC) network. The prices of milk may get increase and company have to pass this cost.

5.      During the FY09-10, Company collaborated with M/s LVP Foods Pvt. Ltd. ( Promoter Bengal & Assam Co Ltd  ) to put up a facility to process and pack liquid milk . Whether it was just life support given by group company or this relationship is going to expand and continue in the future ?

6.      In an interview with CNBC-TV18 on 18 July 2011, RC Periwal, director, Umang Dairy said, the has ambition to be a Rs 1,000 crore company. We hope to reach about Rs 500 crore this year. After three months on  11 Oct 2001 RC Periwal again said expect to see a 20% growth in volume and Rs 130 crore revenues this fiscal year. How much variance this is ?

7.      Promoter holding is close to 75% and Bengal & Assam Co Ltd  has all the subsidiary companies as unlisted . If the company decides to delist Umang Dairies Ltd , then we may get 50 -100 % return in no time but that will be quite less to long term prospect of this company.

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

A Growth Stroy : Kaveri Seed Company Ltd

Note : SOLD My Holding in Dec 2014 with avg price of 870 (equivalent 4350 without split )

Kaveri Seed Company Ltd has produced a very good set of number for Q1FY13 . PAT is increased by almost 110 %  and Kaveri Seed Company Ltd is all set to achieve new highs . I have not written any post on this counter but it is my portfolio from level of 350 . Kaveri Seed Company Ltd  is now trading around 800 and it is still a good bet to get around at least 40-50 % return within one year.

Reason to buy @ CMP of 800 :- Kaveri Seed Company Ltd  is quite uniquely  poised to reach new highs with very minimum downside risk. Yesterday , the investors were booking profit after result announcement and I was buying this stock of Kaveri Seed Company Ltd . Mr Market may prove me wrong in the short term but I was having my own reasoning to buy Kaveri Seed Company Ltd  at around 800 . My reasoning is simple , company has shown standalone EPS of 73.80 and consolidated EPS of 73.42  for  Q1FY13 .  So , consolidated EPS comes to 81.33 for last 12 trailing months .

               Kaveri Seed Company Ltd  is trading at a PE of 9.8 on price of 800 and EPS of 81.33 .  Kaveri Seed Company Ltd  is quality company , which has 3 year high PE of 28.76 and 3 year low PE of around 9 . If this company goes and trade on a PE of 9 then I will be at a loss but same time it turned into compelling buy at a PE of 9 . Just before the result Kaveri Seed Company Ltd  was trading on a PE of 19 . I don’t say that it will again trade on a PE of 19 within one month but over the one year it will again try to touch a PE of at least 15 (Price 1200 ) .  Return of capital employed is also increased from 21.5 to around 28 which will also lure many investors.

               This counter is held  by 5 mutual fund houses and around 8 MF schemes. There are not many companies which are showing growth of 100 % .   There are quite good chances of increase in stake in Kaveri Seed Company Ltd  by these mutual fund houses . Generally , mutual fund houses do not take the decision to invest in hurry in mid cap stock, they do take their own time. I believe more mutual fund houses will buy Kaveri Seed Company Ltd  in coming years.

Positive Point :

1.      Low PE valuation .

2.      High growth stock .

3.      Kaveri Seed Company Ltd has good moat , it has a competitive advantage and entry barrier by developing new seeds and patenting them.

4.      ROCE around 28 % also looks good .

5.      Recession proof business , Indian farmers can compromise on food and other consumptions but do not compromise on seed quality.

6.      Non Cyclic Business , even deficit monsoon not affected the performance of the company .  If rain is not sufficient during sowing season , then farmers have to resow it that increases demand.

7.      Kaveri Seed Company Ltd has good future plans , it will interesting to go through the upcoming annual report of FY11-12.

8.      Promoter holding is 65% and no pledge shares by promoters

9.      Very good balance sheet and ratios.

10.   Advances against sales of 110 crores against sale of 233 crores in FY10-11 annual report . It shows demand of products in the market . Indian great value investor Prof Sanjay could be happy to see these figures but “Advances against sales” is a bit different than “Advances from Customer” .

11.   The agriculture sector is backbone of India . The government promotes seed sector by schemes like “National Seed Project”.Agriculture income is tax fee in India that’s why   Kaveri Seed Company Ltd  has to pay very little tax. Income derived from “sale of seeds” is also considered as Agriculture income. Please refer http://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.html for more details.

You can also refer judgment in case of HIGH COURT OF MADRAS, Commissioner of Income-tax Vs Soundarya Nursery.

Judgment cleary says “The seeds were clearly a product of agriculture and the income derived from the sale of seeds, was agricultural income. We answer the question referred to us in favour of the assessee and against the Revenue”  Please refer following link for this judgment http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B2000%5D241ITR0530(Mad).htm

Concern / Risk :

1.      I have not figured out any red flag in annual reports but any corporate governance issue is the risk which is applicable to all the stocks including HDFC bank and Infosys.

2.      If the company is not able to produce new seeds which are better than competitors.

3.      Any regulatory changes related to BT.

4.      Government stops support/ tax benefits to seed sector which is quite unlikely.

5.      Government companies / agency like BARC developed new seeds and distribute free or nominal rate to farmers.

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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in it. As always , please take the advice of a financial adviser . As I mentioned , I already have my holding in this stock.

A company that can lay golden eggs

Let’s assume (hypothetical example) that somebody ( maybe XYZ bank) is going to offer me a loan of 50 Cr @ 15 %  ., With the condition I should pay interest per year and can repay partial amount any times and need to pay back the full amount after 5 years. First of all I do not like to take a loan but they offer me to think over the offer and  get back on offer within a month. I don’t like and suggest anybody to invest in the stock market with loan amounts that too with high interest rate. But , I have come to following option to make the most of this offer by investing in the stock market.

1.      Investing in Growth Stock : I should invest in high growing companies like Jubilant Foodworks Ltd , Page Industries . But it will be too much risky to invest in these high growing stocks , because these stocks are already trading at high valuations . Then , future growth of these stocks depends on many variables . I can’t predict future cash flow with these variables with my comfort level of variance .No certainty in cash flow , So this option is not suitable for offer.

2.       Holding Companies : I have another option to buy stock of holding companies which are trading 30% of their holding value . I should buy majority stake in this type of company and sell all the investment. I agree , I will not able to get majority stake at such discount rate , then there will be some tax impact. But if I assume that if I able to get at 50% discount and paid 30% tax then also I will able to make 66 % money on my investment with very minimal risk .

Holding Stock value	Acquisition Cost	Profit	PAT
100	50	50	33

               I can make a cool 33 car in a few months with few assumptions, but it will be one time profit. This is defiantly one of the better options.

3.      Golden Eggs Stock/Company : By buying & selling holding company I can make one time profit but what if I can get a company/stock which can lay golden eggs regularly.

Guess which company it is ? Is it MMTC  Ltd?  No .

               It is Indsil Hydro Power & Manganese Ltd . Let me explain how it can lay golden eggs. Last trading price of  Indsil Hydro Power & Manganese Ltd is 23.45 , which translates into market cap of only 37 Cr. Now assume that I am able to get whole company or majority stake at current price .

After getting a majority stake my  first steps will be to demerge Hydro Power Project unit in separate company from Indsil Hydro Power & Manganese Ltd. So there will be now two companies first Indsil Hydro Ltd and second Indsil Manganese Ltd. Indsil Hydro Ltd will have just power plant & all the cash , debt, investment etc. will be part of Indsil Manganese Ltd.

Indsil Hydro Power & Manganese Ltd is having following liabilities & asset on the book in last audited financial year. All values are in crore.

Liability Side
SECURED LOANS	6.63
Buyer's Credit for raw materials	4.2

              

Asset Side
Equity & Debt MF , Investments	5.26
Net Current Assets(including cash 8.02 Cr.)	26.74
Closing Stock of Raw Materials	19.65
Land accumulated in the last 22 years on the book value , current price may be 3-4 times	2.42
Building at cost (including Indsil House in posh locality R.S.Puram, Coimbatore)	29.8
Plant & Machinery	46.86(Deprecated 22.14)
Transmission Lines	2.67 (Deprecated  1.86)

Note :- I don’t know bifurcation of assets of hydro power project & smelter unit.

My second step will be to sell Indsil Manganese Ltd since it is in cyclic business and I do not want to take any risk since I have to pay loan @15 . By looking above figures of asset ,14000 M.T. INSTALLED CAPACITY of Silico Manganese , esteem fortune 500 client list and upcoming 75,000 tonne per annum ferro chrome smelter in Oman(25% stake). I can easily make PAT of 50 Cr  by selling alone Indsil Manganese Ltd , even considering, no power linkage will increase production cost. I am also not considering Sree Mahalakshmi Smelter acquisition since acquisition was done in the current year.

Let’s be conservative and assume I am able to sell Indsil Manganese Ltd with PAT of 30 crore . So , I will return 30 crore to my lender. So, now my loan amount will be just 7 crores  .

Now I would have only one company Indsil Hydro Ltd . But how will it lay golden eggs regularly ?

Bronze egg laid by Indsil Hydro Ltd will become golden by REC (Renewable Energy Certificates) .

REC get traded on INDIAN ENERGY EXCHANGE .

What is REC (Renewable Energy Certificates)?

Refer http://www.gktoday.in/understanding-renewable-energy-certificate-mechanism/

               Hydro power plant of Indsil got Registered on 16-01-2012 REC . So, it is eligible to sell REC certificates on the exchange.

                              Refer https://www.recregistryindia.in/index.php/general/publics/registered_regens for complete registry .

              

What is REC rate ?

               Price band of REC for non-solar category is from 1500 to 3900 . First year Avg traded value was 1500 but last year it has improved to 2900 .

Last month Avg value was 2402. Most of the action is seen in near year closing period . So, price can be improved from here .





 

We can check last trading price at http://www.iexindia.com/RECData.aspx .

Get all the news about REC (Renewable Energy Certificates) in India at http://reconnectenergy.com/blog/category/rec-mechanism-india/renewable-portfolio-obligation-rpo/

How much it will benefit to Indsil Hydro ?

I don’t know exact PPA of company with KSEB for power . But I have observed Avg rate of 3.33/unit in the last few years as per annual report. Apart from this power sell  revenue , now there will be additional revenue by selling REC units. This additional REC revenue will be without any expenses. 

			REC Revenue @
Power Unit in crore	Power Unit Sell rate	Revenue From Power Sell	1500	REC+ Power Sell Total Revenue @1500	2402	Total @2402	2900	Total @2900	3900	Total @3900
3	3.33	9.99	4.5	14.49	7.206	17.196	8.7	18.69	11.7	21.69
4.3		14.35	6.47	20.82	10.35	24.70	12.50	26.85	16.81	31.16
5		16.65	7.5	24.15	12.01	28.66	14.5	31.15	19.5	36.15
6		19.98	9	28.98	14.412	34.392	17.4	37.38	23.4	43.38
7		23.31	10.5	33.81	16.814	40.124	20.3	43.61	27.3	50.61

21 MW power plant can generate 18.4 crore units (21*1000*24*365) in a year at 100% load factor . It can generate 7.36 crores unit at 40 % load factor . If I am not mistaken , then the company’s highest record is around 7 crores unit .

As per annual reports, history of power units generated in last 6 years. You can access last 2 years annual report from BSE web site. http://www.bseindia.com/bseplus/StockReach/StockQuote/Equity/Indsil%20Hydro%20Power%20And%20Manganese%20Ltd/INDSILHYD/522165/IronSteelIntermProducts

	Year
	2006	2007	2008	2009	2010	2011
Unit Generated in crores	5.2	3.97	5.89	2.7	3.78	4.3

Case1 :

The company had generated 4.3 crore units last year if company do the same then also it can generate revenue of 26.85 crore on last year’s Avg REC rate.

Whatever amount of capital company has actually employed in power planct, but for me I have employed only 7 Cr . So it becomes 300 % return my capital employed and it is not one single year that is a golden egg laid by Indsil Hydro. It is going to continue for many years . Only issue I will face is , I cannot re-invest that amount @ ROCE of 300% in the company again. I will have to deploy earned amount elsewhere, after paying the interest of around 1 crore to my lender .

The registration granted shall remain valid for a period of five years from the date of registration certificate i.e. 15/01/2017 for Indsil hydro. Company can apply for revalidation or extension of validity of existing Registration at least three months in advance prior to expiry of existing Registration. Please refer https://www.recregistryindia.in/index.php/general/publics/ProcedureRegistration for more details.

Now consider power plant produce 4.3 crores units every year in next 30 years and also assume REC units will be traded on avg price of 2900 for next 30 years . So our total revenue comes to 4.3*(3.33 + 2.90) = 26.79 . Now reduce 1 crores of operation expense (very low in case of Hydro Power project), 1 crores of interest on my personal loan and tax around 8 crores . My final profit will be 17 crores / year . Yes , with big assumption REC will be continue for that long period and realized rate is 2900/unit. We are at least sure about next 5 years .Now we will calculate my wealth for next few years by investing my profit 17 crores / year  . After seeing following figures , don’t be hesitate to call me biggest mad on the earth. It shows too much pretty picture which is unbelievable.

	Wealth in crores after following years
	3	5	10	15	20	25	30
9% p.a. RD	61.18	112.13	287.69	562.57	992.93	1666.74	2721.72
Got lucky , invested in MF /other investment with return of 15% pa.	69.22	135.91	422.29	1025.75	2297.35	4976.84	10623.02

Case2 :

Now I will come from sky to ground. Current market cap of company is 37 crores .  I make deal with promoter and followed by open offer , I managed to get this company 3 times current market cap i.e. around 110 crores . Now I will sell smelter division with 30 crores with all asset & liabilities. Now I will have only power plant with zero debt . My cost is 80 cores , I will have to pay interest @15 / year i.e. 12 crore / year . Lender was kind enough to extend loan amount.

Total Revenue		26.85
Interest Paid	12	14.85
Operational Expenses	1	13.85
Tax	4.155	9.695
	PAT	9.695

My PAT / year will be 9.70 but consider it is 9 crores . I am not lucky so will invest in recurring deposit @ 8 . What will be my wealth now ?

	Wealth in crores after following years
	3	5	10	15	20	25	30
8% p.a. RD	31.7	57.43	120	269.57	458	738	1154.05

 It can be more if I retire my high interest rate debt first instead of investing in RD@8. That will be another calculation , so avoided it.

Case3 :

            The promoter is holding more than 53 % and government is holding 6.64% in this counter . Promoter saw a dream . Not sure about promoter but the analyst (even rating agencies) are coming on business news channels and saying the Government  is sleeping .

God came into dream of the promoter and said leave all these moh maya ( illusory world ) of  metal and commodity business and create golden laddu (egg is Non Veg, so god avoided it)  for your shareholder and being yourself major shareholder you will also get majority of golden laddus( ball) . Promoter reacted immediately  and made plans similar to mine .

               Step1 :- Sold all business of smelter unit along with Stake in other company ,MF,raw materials , cash ,asset , liability in 30 cr PAT ( I am not a tax expert , but if company sells these business units then tax should be less , and tax should be on profit by selling these units) . Since, the company is going to adapt shareholder friendly policy , So decided to pass on these profit immediately as dividend and shareholder can reinvest that amount as per their own choices.  Current effective Dividend Distribution Tax is 16.23% which translates into 4.869 on 30 crores. So , per share dividend will be 30-4.869/1.59 = 15.80 . The shareholder will receive tax free cool dividend of 68 % on current price around 23. So the effective invested amount becomes 7.5 / share for shareholder invested around price of 23.

Last year power plant generated 4.3 units which is also coincidentally average of the last six years. Now consider it will be same average in the future .

Total revenue from power plant will be 4.3(3.33+2.9) = 26.85 .  There will be 1 crore operational expenses ( hydro power plant is known for low operational expenses) . So PBT will be 25.85. If you analyze last few years annual reports then you will figure out tax is always less than 30 % PBT . Let’s assume it's 30 % . Tax will be 7.75 . PAT will be 18.10 crores . Since the company is going to adapt shareholder friendly policy , will give this amount as dividend to shareholders . So , shareholder will receive tax free dividend of 9.53/share per year after paying DDT. It comes to around 41 % of current price but we had received dividend 15.80 after the sale of smelter division  . So , on our effective price of 7.5 we are receiving tax free dividend of 9.53 which translate into whopping 125 %  per year and shareholder has his/her own choice for reinvesting it.

Advantage of applying above mentioned strategies :

1.      Cost of raw material (water) is almost zero for golden eggs , Even, Hen which used to lay golden eggs might have been consuming high cost raw material. 

2.      Average age of hydro power plant is 40-50 year . It has operational from last 12 years . So still long life is remaining.

3.      I can go on long quarterly vacation , just need to take a weekly status report of unit generated.  Complete peace of mind.

4.      Most of the revenue is going to the bottom line , the government gives some tax benefits as well.

5.      Little or no competition.

6.      Average rainfall in Idukki district of Kerla is 3265  mm , which is 3 times the Pune district average rainfall .So very low chances of drought.

7.      21 MW power plant can generate 18.4 crore units in a year at 100% load factor. Some of the hydro power projects run with a load factor of 60 % . So there is scope to increase efficiency further .

8.      I don’t know the exact detail PPA of company with KSEB . Any increase of tariff rate as per PPA, in the next few years will be surprisingly positive.

9.      No exchange rate related worries.

10.   No direct risk of what is happing in USA , Europe elsewhere in the world . Since, I have already sold risky and cyclic business unit.

11.   It rarely matters who becomes the next PM . No issues if Narendra Modi or Rahool Gandhi or Digvijay Singh becomes PM.

Risk :

1.      Most of SEBs are already on the verge of bankruptcy , if anything happens to  KSEB and no other buyer is willing to buy .

2.      Any physical damage to power plant which is not insured .

3.      Any negative policy for REC.

I just want to elaborate how much cheaper this stock is trading now . Nobody , is going to offer me a loan in crores.

As we know , Warren Buffet has made a lot of wealth not only by buying stocks from the market but also majority controlling stake in the company .

I don’t know how great investor like Warren Buffet, Charlie Munger, Seth A. Klarman , Peter Lynch , Mohnish Pabrai ,Rakesh Jhunjhunwala or Professor Sanjay Bakshi would have reacted to similar type of opportunity but I, a normal value investor would have grabbed it with both hands if the fund is available with me. Not only on current market cap of 37 crore but till 3 times of current market cap i.e. 110 crores.  110 -30 = 80 Investment , 26.85 Avg revenue which translates into 33% return on my investment or capital employed every year.

Investing in Stock of Indsil Hydro Power & Manganese Ltd :

One think is sure buying a company and buying a stock is completely different thing , even though stock buying is considered to be buying a portion of the business. If you are buying stock of Indsil Hydro Power & Manganese Ltd then there are a couple of extra risks emerges as compare to buying the company.

Stock Risk :

1.      Any corporate governance issue is risk , which is applicable to every stock.

2.      It is not possible for a company to demerge power plant . It will increase silica manganese plant production cost. So, stock can’t become risk free.

3.      Even though there will be predictable and stable revenue from power division but any global issue can impact smelter division.

4.      We are not aware Sree Mahalakshmi Smelter acquisition impact on the balance sheet.

Best time to invest in this stock would be when we see that smelter division is expected to show a profit. Smelter division has posted around 5 crores of loss for Last 9 months.

Now calculate expected price when good times return for smelter division . I don’t know when that time will come maybe 3 years , 5 years or next year. Nobody knows.

Due to the de - bottlenecking operation , Sree Mahalakshmi Smelter acquisition and upcoming 75,000 tonnes per annum ferro chrome smelter in Oman (25% stake) , I am sure in good days Smelter division will post PAT in excess of 15-25 crores .

			Expected Market Cap @
Power Division PAT	Smelter  Division PAT	Total PAT	3PE	4PE	5PE	6PE	7PE
20	10	30	90	120	150	180	210
20	20	40	120	160	200	240	280
20	25	45	135	180	225	270	315

I don’t know how will be price movement of this stock in near future . There might be seller which will sell even below Rs 20 because they are not interested in fundamental of the company or have great knowledge of commodity pricing and expecting more & more losses for smelter division . Secondarily , this is a small cap with inconsistent growth , so very few analysts or nobody is going to analyze it in some depth. But one thing is sure whenever good days will return to smelter division , it will become multi bagger from current levels with minimum risk .The promoter also senses an opportunity to increase stake at low valuation and due to REC positive impact, last quarter promoter shareholding increased (first time in last 4-5 years) from 50 % to 53.63 % . I believe they are also having a shortage of funds like me , else should have brought more than 5 % and given open offer  .

If you know any stock with golden eggs then please share with us , together we will make impact to reduce import of gold and contribute to reduce the current account deficit of India .

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