About
Balmer lawrie is a diversified government owned company. It has the following diverse businesses
– Industrial packaging: Drums, barrels etc
– Logistics infrastructure and services
– Travels and tours
– Greases and lubes
– Tea
– Others
The company is a profitable PSU, a zero debt company and now has surplus cash on its books.
Financials
The financial performance of the company has been improving steadily from an ROE of 12% in 2004 to almost 24%+ in 2008. The Topline for the company (includin JV and Subs) has grown from around 1100 to 1788 in 2008 giving a CAGR of 10%. The bottomline has improved from 31 Crs to 99 Crs in the same time period indicating an improvement of profitability.
Positives
The topline has grown by 10%, however the netprofit for the company has almost tripled in the same time period. The company has now become a zero debt company (including JV and subs) now, with surplus cash on its books
In addition the company management realizes the importance of allocating capital . They have indicated that they are looking at exiting low profitability businesses like tea and invest in the more profitable ones. This is also visibile from the improvement in profits over the topline.
In addition the excess cash has been used to reduce the debt too.
Risks
Everything said and done, this is still a PSU. So there is always a risk that the government may do something stupid. However in the recent past the profitable PSU’s are being allowed to operate with autonomy (barring the Oil PSU’s). Still a risk exists.
Almost 60% of the profits come from the logistics and infrastructure serivces division. So any drop in profitability of this division could impact the company strongly.
Management quality
The PSU label seems to indicate that the management quality is poor. I think that would be as wrong as saying the MNC label indicates good management. Each company and its management should be evaluated based on its own merit.
Management compensation – Being a PSU, the compensation is a bit too low.
Capital allocation record – The management has had a good and sensible record of capital allocation. They ROE has been increasing steadily over the years due to the management focus on better performing PSU such as tour & travels, logistics and divestment of the poor performing businesses such as Tea (in UK), projects etc. In addition the management has reduced debt and also increased dividends.
Shareholder communication – Fairly decent. The management has regularly discussed the strenghts and weaknesses of each SBU, plans for each of the businesses and have been transparent on the downside risk of each business (may be a bit too pessimistic)
Accounting practise – Good. I don’t see any aggressive accounting.
Conflict of interest – None from the management. However the majority shareholder is the government. Till date there has been no interference.
Valuation
The company sells for around 3-4 times the cash flow for 2008-2009. With an ROE of 20%+, and a moderate 10% net profit growth, the instrinsic value seems to be around 1500 Crs or higher for the whole company.
An alternative approach to valuing the company would be to value each division individually as some have great economics such as the logsitics division and some horrible, such as the Tea division. The sum of parts valuation of the company is loaded in the google groups here
Conclusion
The company seems to be selling at greater than 50% discount to instrinsic value. It seems to carry a PSU discount to its valuation too. Finally, the company has a dividend yield of almost 5%+ and this dividend yield look sustainable too.
disclaimer : I have a holding in the stock.
Don’t you think an even cheaper way to invest in BL is to invest in Balmer Lawrie Investments? It might be the immediate beneficiary of a divestment in case the BJP and its allies or the UPA sans the Left comes to power after the next general elections?
Hi josei agree it is. however the discount gap keeps fluctuating and it could close if the divestment happens. however i am not sure if the divestment will ever happen regardsrohit
well holding companies of much bigger and popular houses like NW 18 and JSW 18 holdings are trading at 50-60% of thr intrinsic values in case of BL tht mite be even more !!Rohit – any news on BL selling its tea assets in London for 100 crs or so !! tht might add more to book value and hence possible bonus cadidate as well !!being PSU – divestment and diversification both will be slow process unless some PE or big indian house buys some stake in this counter and changes the fortunes !!
Hi how did you come up with ROCE 29% on indu.packaging ?ebit/capital employed
Hi nitini have not heard of any news of BL selling their tea business. i am not looking at divestment as a catalyst as i dont expect it any time soon. rather if the business continues to perform as well as it has been doing for the past few years, then the returns will be good (though not spectacular)uresh – ROCE may a wrong term in the spreadsheet. the calculations are ebdit/capital employed. those calculation are to get a rough idea of how the business is doingregardsrohit
http://www.thehindubusinessline.com/2007/11/02/stories/2007110251901600.htmchk this link Rohit – this should add to the value in long terms and momentum in the short term if it happens – here is the abstract -Tea deal talk lifts Balmer Lawrie The recent market buzz has been that the diversified ‘mini ratna’ PSU Balmer Lawrie may soon finalise the sale of its London tea business for about Rs 100 crore and consider a 1:1 bonus to capitalise its bulging retained profits. Mr S.K. Mukherjee, MD, confirmed to Business Line that the sale of the London assets (warehouse and blending packaging unit on 24,000 sq ft area at Bradford) would be wrapped up soon. He, however, did not divulge the sale price. He also denied issue of bonus share for the present, but did not rule out the possibility in future. The company has a paid-up capital Rs 16.29 crore while reserves stood at Rs 254 crore as on March 31, 2007. The company has paid out dividend of Rs 13.50 per share of Rs 10 each for the year to March 2006-07. The company has disposed of its assets and surrendered its lease rights on land at Chembur in Mumbai for a profit of Rs 4.26 crore in the September quarter
Hi,Balmer Lawrie is a good stock .. I too have a holding here. Lots of FCF, negligible debt. Only sales have stagnated .. but if we draw a parallel to Sears Candy … even at a 2% growth rate, the business doesnt require too much of capital to operate. If uses existing machines, rakes in money which is not invested back into running the machines (and is handsomely given back to the shareholder .. current div yield of 3.5%)Warm RegardsShankar
Hi nitinthanks for the link. the development seems to be in the right direction. the company had stated its intention earlier to dispose off the weaker businesses and invest in the profitable ones.they have been improving the performance for the last few years and it is a better company in 2008 than 2003. although the growth is not very high, the company is more efficient and profitable.regardsrohit
Hi shankarthe sales are growing at around 6-7% per annum. not high, but not too bad either.profits have grown at 22% per annum for last 4-5 years. that is definitely good. the company has used the money to retire debt. In addition the management seems rational in managing capital. they are exiting the bad businesses and investing in the good ones. It is decent business which is available at a very attractive valuation current mcap around 625 crsnet cash on hand in 2008 likely to be around 60-70crs.consolidated profits to be around 90-100 crs.so the business is available at roughly 6 times earning. regardsrohit
I like how this company looks i think i will take a closer look at it and most likely buy it thanks for the tip
Hi Rohit,where do u look for the companies, i.e. filters through which you can screen your stocks…like mcap > 200 cr, modest sales growth of around 7-8% since last 4-5 years, RONW of greatr than 15%, is there any available info for this….or do u go on reading each and every annual report available???? Please reply…thanks
Hi rathini use the filters provided by icici direct. quite often their numbers are not correct. i use the output from the various filters and load the companies on a spreadsheet and run a filter based on a combination of factorsfor : Mcap > 100, PE 15% etcthe companies which come up, i recheck their numbers in livemint.com. once the company checks out, i start a detailed analysis – read AR, research etcregardsrohit
Hi Rohit,thanks for the info. I have also found out another website “www.kotaksecurities.com”, which is also offers good screeners….Thanks for the maruti analysis…i had bought the stock for around 950 bucks…(2 shares)….made a mistake…of not keeping margin of safety…Will learn from these mistakes…sorry for troubling you with some stupid questions….But please be ready for another ones too…Regards,Rathin
hi rathinthanks for the tipi dont think maruti @ 950 is a mistake. quite possible that my own analysis is too conservative and your facts and analysis are more accurate.i think your questions are good and feel free to post them. i will try to answer them the best i canregardsrohit
Hi Rohit,In this article you have mentioned that the accounting in the company is not aggressive.Could you please explain this as I can’t understand what it means.Also could you please confirm as from where you are getting information related to the Allocation of Capital.Is it mainly from the Annual Reports ?Thanks,Hari
Hi Rohit,I have some questions as I am not familiar with the Indian exchanges. As per the comapany's investor relations website, this stock is listed on both NSE and BSE. 1) What is the advantage of listing on different exchanges in the same country as there must be costs involved in listing? Is it to get exposure to more investors and increase liquidity as the two exchanges have different clientele?2) Does this lead to arbitrage opportunities? I believe the closing price for this stock was different on both exchanges but can't really confirm.3) The company's website lists the symbols as follows:Bombay Stock Exchange Ltd.523319 National Stock Exchange of India LtdBALMERLAWRIE Strangely, searching on yahoo for the company brought up this result:BALMLAWRI.NS BALMER LAWRIE & CO LTD NSE BALMLAW_a.NS BALMER LAWRIE & CO LTD NSETwo listings on NSE with slightly different prices. No sign of BSE listing.Being familiar with only US exchanges (NYSE & NASDAQ), I find this quite confusing.Any clarifications in this regard appreciated.Thanks,Santosh
Hi hariaggressive accounting is a fairly broad topic. example of aggresive accounting would booking revenue earlier than actual sales or even if the returns are possible, writing off assets to reduce depreciation expense and massage future earnings etc. In a nutshell, aggresive accounting involves lumping losses together so that the future profits can be artifically inflated.the capital allocation information is not explicit in the annual report. you have to see how the ROE is trending and what kind of investments the management has done and what kind of returns they have got in returnregardsrohit
Hi santoshNSE and BSE are two main stock exchanges in india.traditionally companies were listed on BSE and some regional exchangethe NSE was started a few years back and i think (not sure though) it must be the largest exchange now. so companies are listed on it.so i think these two exchanges are the largest in india and hence most companies are lised on bothi am not sure if there arbitrage present to a large extent, especially after the bid ask spread and commissionnot sure why yahoo has balmer lawrie listed in that. try looking it up on google finance or some indian financial websiteregardsrohit
Thanks Rohit. I looked up Google too. It’s got 3 listing for NSE:BALMLAWRIE (this seems to be actual symbol – closing price 287.95)BALMLAWRIE.RLBALMLAWRIE.BLOn BSE:523319 (closing price 290.20)I guess I will have to get used to the BSE and NSE symbology. Regards,Santosh
dear rohit siri am an indian army doctor following u veryfaithfully. so had a handsome gain from oct08 portfoliobut i sold off balmer at 250 price since ur blog says 5-8% returnsir i am still a novice at exit strategy shall i enter it at current levels too
Hi hariyou can read this thread on TED – http://www.theequitydesk.com/forum/forum_posts.asp?TID=1964it talks of all the aggresive accounting going on , especially around forex lossesregardsrohit
hey rohit..dsnt it bother u that the company has too many unrelated businesses..dsnt this affect mgmt efficiency? diversification is fine..but this is takin it to the limit a bit huh? ;-)neeraj
Hi anonymousmy personal goal is to beat the market by 5-8% (not 5-8 % returns) which translates into approximate returns of around 18-23% per annum on portfolio basis.this is my personal goal, not something i am recommending for othersI also do not give buy or sell recommendations on specific stocks and leave it to the readers to make their own decisionsregardsrohit
hi neerajthe wide range of businesses is more of legacy of the company. i would personally prefer if the company exited the businesses with poor returns. however it may not be as easy as it looks as this is a PSU and there are labor and other issue involved with the poorly performing SBUfinally, on an aggregate basis the management is still doing a decent job and moving the right direction.that is much more than what you get from almost 90% of pvt companiesregardsrohit
Nice review Rohit.My calculations also on the same line. Intrinsic value of the company comes around 1650 crores. That brings IV Rs. 1000 per share.CMP is at 71% discount of IV.regardsAni
Rohit..Balmer Exiting Domestic Tea market.http://www.hinduonnet.com/thehindu/holnus/006200904231552.htmregardsAni