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.

Company	Mcap	PE	Promoter Shareholding (%)	EV to EBITDA
Surat Textile Mills Ltd	34.2	1.6	80.85	1.12
Rama Phosphates Ltd	151.78	5.3	81.46	2.49
Sah Petroleums Ltd	114.62	NM	86.89	2.82
Madras Fertilizers Ltd	289.98	NM	85.27	3.75

           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 . 

Transgene Biotek Ltd , investor’s dilemma on delisting

Warning :-May be heading toward GDR scam

Note : - This is just a case study for learning and gaining more experience by the tricky delisting offer of Transgene Biotek Ltd.  Just watch from outside and do not take part in it unless you are ready to take high risk.

There are two delistings going on in the stock market which are at their initial stage . First is  Ricoh India Ltd and the second is Transgene Biotek Ltd. Ricoh India has declared floor price as 53.79 ( https://ricoh.co.in/uploads/PDFs/about/investors/delisting-information.pdf )  but it is trading around 77 . On other hand Transgene Biotek Ltd has declared floor price of 25 (source: http://www.bseindia.com/stockinfo/AnnPdfOpen.aspx?Pname=Transgene_Biotek_Ltd1_070912.pdf ) but it is trading at 11.89 and every day there is down circuit . What does it mean ? Investor are predicting Ricoh India Ltd delisting will be surely successful and it will at a premium . If somebody is taking risks to buy Ricoh India @ 77 then he might me thinking delisting price above 85-90 . But the risk reward ratio is not in the favor of investor in case of Ricoh India Ltd , if delisting get failed then it may touch again in 30-35 . Daily downward circuit in Transgene Biotek Ltd means the market is predicting Transgene Biotek Ltd will not able to delist and delisting will be getting failed . Does it really true ? I don’t understand Pharma companies in depth , especially Transgene Biotek Ltd where many investors burnt their fingers in the past. Not many investors trust management of this company. I am not going to include fundamentals of this company in my  case study for delisting .Not many investors are taker of the announcements made by the company in the past and those announcements not reflected in the bottom line of the company. This stock is known as operator driven stock .

By looking above screen from BSE, Transgene Biotek Ltd will become the stock of laugh . How can a company which does not have even 10 % share will go to delist ? Are you kidding ?

Does really delisting of Transgene Biotek Ltd is impossible ?

Now see detail promoter holding from BSE site .

Now this custodians figure is game changer .  As per SEBI regulations “Any holder of depository receipts issued on the basis of underlying shares held by a  custodian and any such custodian shall not be entitled to participate in the offer. “ Source :- http://www.sebi.gov.in/acts/delisting2009.pdf . This pdf document contains detail act/rule about delisting.

Who can then participate in delisting process , the answer is simple only ‘public shareholders’ . What is the definition of ‘public shareholders’ , ‘public shareholders’ means the holders of equity shares,

Other than the following:

(a) promoters;

(b) holders of depository receipts issued overseas against

equity shares held with a custodian and such

custodian;

(again source : http://www.sebi.gov.in/acts/delisting2009.pdf )

So as per SEBI rule only 16.78% investor can take part in delisting process of Transgene Biotek Ltd .

There are lot of steps involved in delisting process but first  important one is Postal Ballot “Obtain the prior approval of shareholders of the

company by special resolution passed through postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution:  Provided that the special resolution shall be acted upon if and only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it.”

Many investors are worried and thinking Transgene Biotek Ltd’s postal Ballot may get failed .  Stock price of company is moving toward 10 and company offering minimum 25 for delisting , obviously public investor will vote in favour of it unless he is very much sure this stocks worth much more than company is offering. How many of these investors will be there specially lot many burnt their fingers in this stock by investing for the long term. So, if the process is fair and transparent then postal ballot will not make any hurdle .

Once company announces for book building process then they are obliged to accept the Discovered Price if its equal to the Floor Price, but is under no obligation to accept the Discovered price if it is above the Floor Price. Since Transgene Biotek Ltd is trading well below 25 , chances are floor price will become discovered price . If by any chance discovered price is more than 25 then the balls will be in promoter’s half to accept it or reject it.

Then there is SEBI regulation for declaring delisting process success . Most of the investors are worried about this part.  How can promoter increase their holding to  90 % . It looks impossible but what does exact guidelines of SEBI . Again from  http://www.sebi.gov.in/acts/delisting2009.pdf

An offer made under chapter III shall be deemed to be successful if post offer, the shareholding of the promoter (along with the persons acting in concert) taken together with the shares accepted through eligible bids at the final price determined as per Schedule II,  reaches the higher of –

  (a) ninety per cent. of the total issued shares of that class excluding the shares which are held by a custodian and against which depository receipts have been issued overseas;   or

  (b) the aggregate percentage of pre offer promoter shareholding (along with persons acting in concert with him) and fifty per cent. of the offer size.

The most important word for me is “or” in above rule . is it typo mistake ? If not then it will make life easier for delisting process of Transgene Biotek Ltd.

Both these rule are very well explained by The Practical Lawyer Vijay Pratap Singh Chauhan  Source :- http://www.ebc-india.com/practicallawyer/index2.php?option=com_content&itemid=5&do_pdf=1&id=14981

(a) 90% of the total issues shares of that class held by the public (excluding the shares held by a custodian and against

which depository receipts have been issued overseas); or

 - (b) the aggregate of the promoters’ pre-offer shareholding and 50% of the offer size. For instance, where the

pre-offer promoter shareholding is 75%, the promoter will have to achieve a post-offer shareholding that is the higher of

90% or, 75% plus half of 25%, i.e. 87.5%. Thus, where the pre-offer shareholding of promoters is 85%, the promoter

must acquire 92.5% to be able to delist that particular class of shares of the company.

What does it mean for Transgene Biotek Ltd ? As per rule “b” delisting process will be successful if  they are able to acquire  half of the 16.78 % (8.39% ) public shares i.e. 11036206/2=5518103. ( Without GDR conversion )

Does it really difficult for the company to acquire this much share ?  I don’t know management and I don’t track fundamentals of this company but prima facie does not look difficult.

If discovered price remains same as floor price then how much promoters along with FII investor will have to shed  ? 11036206 * 25 = around (27.6 crores)  . That is not much big amount given company was able to placed GDR of 23 million dollar . I don’t know who are GDR holders whether they have done their due diligence or not . But for their FII investor 27.6 crores rupees is not a big amount if company is really promising .

Delisting of Transgene Biotek Ltd is quite complex and somewhat similar to Carol-Info where investors were having their own doubt about the success of the delisting process . Carol-Info was also having GDR (custodian shares) . It was having promoter shareholding around 64% but managed to delist successfully.

If we see price movement of Transgene Biotek Ltd share then it looks like that it can touch 10 sooner, at that price risk reward will be in favor of the investor . I don’t know the fundamentals of this company but if we look 52 week low price then it is around 9 . So at the price of 10 , if we assume downside upto 9 ( may go further) then an investor can lose 10 % but can gain 150% if the delisting offer get successful . Since , I don’t track fundamental of this counter , I am not sure about the downside .

If the promoter and FII (their investor )  are really serious about delisting then this delisting look possible in spite of  low promoter shareholding.

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Disclaimer : Please treat this post as a case study for delisting and not investment advise .

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 .