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.

About
Grindwell Norton Limited (GNO) is one of the subsidiaries of Compagnie de Saint-Gobain (Saint-Gobain), a transnational Group, with its headquarters in Paris and with sales of €43.8 billion in 2008.
The main business segments for the company are – Abrasives and Ceramics & Plastics

Financials
The company had a revenue of 523 Crs in 2008, showing a growth of 13% over the previous year. The company has shown a consistent growth in excess of 10% per annum for the last 5 years. In addition, the company has maintained an ROE in excess of 15% during this period. Inspite of the rise in RM costs during this period, the company has been able to maintain a net margin of around 10%.
The net profit has grown much more rapidly during this period. However due to the sudden slowdown in the economy, the company had a bad Q4 and has had a small drop in net profit in 2008.The company has no debt on its book and actually has some surplus cash.

Positives
The company is in a duopoly situation in the abrasives market. Along with carborundum universal, Grindwell is the only other major player in the market. In addition, the company has R&D support of its parent. The company has been investing in new facilities in India and is looking at growing the business.
The company has a wide range of products, good brands and a strong marketing, sales and distribution network.
Financially, the company has done fairly well in the past and has grown its sales and net profits are a decent rate, while maintaining a high ROE. The company has a dividend payout of almost 40% and has been investing the rest of the capital in the business.

Risks
The company faces the risk of imports from china and from the unorganized sector. In addition, the company had a bad Q4 in 2008 and will face a tough 2009. The company has Indian partners too, but still one cannot rule out the possibility that the MNC parent may try to buy out the minority holders cheap.

Competitive analysis
The key competitor for GNO for comparative purpose is CUMI (Carborundum universal limited). Although both the companies are in similar businesses, their profiles are quite different. CUMI has now expanded into the foreign markets with acquisitions and JV’s in the last 2 years. CUMI has also taken a substantial debt load (Debt equity now at 0.9:1) to fund these investments in acquisitions and new facilities.
In view of the slow down in sales, higher debt loads and higher RM prices, the Bottom line for CUMI has dropped by 20%+ in comparison to the 10% odd drop for GNO (excluding the one time income and charges).
CUMI now sells at around 11-12 time earnings (considering the debt) compared to 7-8 times for GNO. CUMI has higher upside due to its foray into international markets and new facilities, but also has a higher business risk compared to GNO.

Management analysis
I have added this new section to my analysis. This is necessarily a subjective exercise. I am looking at analyzing the management on certain parameters (details in a separate post)

Capital allocation – Management seems to be doing fine on this count. They have decent dividend payout and are not hoarding capital. Capital is being invested and the returns from invested capital have been good in the past.

Communication – Not good, nor bad. The management has discussed the plusses and minuses of the business briefly and could do a better job at it

Management compensation – The management compensation does not seem to be high. The MD is being paid at around 20 million per annum and there are no stock options for the management.

Related party transactions – Nothing odd in the section, except for some sales and purchases with associate companies. So no red flags here

Valuation
The company sells at an adjusted PE (net of cash and adjusted for non operating income) of around 8-9. The current EV is around 400 Crs. The company is going through a slow down and the current valuations are depressed. The company could see a growth of 15-20% in profits in the next 2 years.

The intrinsic value range is around 700-800 Crs for the company based on a growth assumption of 8%, net margins of 9% and CAP (competitive advantage period) of around 8 yrs.

Conclusion
The company is reasonably undervalued. This is not a stock or company which will give huge returns. The company has low business risk due to moderate competitive advantages in the business, strong balance sheet and decent market position. This is a moderate risk, moderate return stock.

Disclaimer
I hold the stock and hence the above may not be an unbaised analysis of the stock. Please read the disclaimer in blog too.