fundamental analysis of Narmada Gelatin FUNDAMENTAL ANALYSIS NARMADA GELATINES

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1 FUNDAMENTAL ANALYSIS OF NARMADA GELATINES 1

2 Narmada Gelatin CMP: INR140 Buy Narmada s results were in line with EBITDA margins of 19.39% (v/s est 16.72%) and EBITDA of INR23.6cr (v/s Last year of INR17.84cr). Net sales grew by 14.14% YoY to INR121.8cr (v/s Last year INR cr), driven by a volume growth of 14.14% The capacity utilization of gelatin production by company was 83.6% against industry average of around 61%. Key highlights from earnings call: Considering the growth of urban population and the increasing number of food and pharmaceutical manufacturing enterprises demand is projected by applying a 10% conservative annual growth rate. CAGR growth of Narmada s is 13.30%. EPS has been increased from Rs27.43 to Rs With the rising global prices, domestic gelatine manufacturers are working to maximise the export orders. Now with the depreciating rupee they will be able to earn substantial increase in revenue by exporting the same. Gelatin users are facing high import duty of 20 per cent compared to 7.5 percent.these factors have led to gelatine prices to shoot up by almost 25 per cent in last two months alone. Hard capsule grade of gelatine, which was available at about Rs.280/- per kg in month of October, 2011, is now being sold at Rs /- per kg, Script ID SHAWGELQ Diluted Eq week range 157/104 Market cap (Crores) Category Fiscal YE FY12 FY13 Total sales (Crores) EBITDA % PAT % EPS P/E P/B EV/EBITDA 2 2 ROE Dividend Yield % Holdings Promoters 75.00% NRI s 0.58% Indian Institution 0.01% Nationalised Banks Nil Domestic Companies 6.76% Public shareholders 17.63% Directors 0.02% Sagar Shah Saggy_cool98@yahoo.com 2

3 Gelatin: Benefiting from strong industry growth IMPORT OF GELATIN Year QTY (Tons) Value ( 000 Birr) PROJECTED DEMAND FOR GELATIN (TONNS) YEAR PROJECTED DEMAND The country s requirement gelatin is met through import. The present demand for gelatin is estimated 102 tons. The demand for the product is projected to reach 180 tone and 291 tones by the year 2018 and year 2023 respectively. India s total installed gelatine production capacity of its nine units is around 20,000 tonnes per year. Currently domestic consumption is estimated at 10,000 tonnes of which 8,000 tonnes is used for the production of hard gelatines and remaining 2,000 tomes for soft gel. The country exports about 12,000 tonnes annually. Many of the users also import about 1,500 tonnes of the same per year. Considering the growth of urban population and the increasing number of food and pharmaceutical manufacturing enterprises demand is projected by applying a 10% conservative annual growth rate 3

4 NARMADA GELATIN COMPANY KEY RATIOS YE Mar FY12 FY13E Per Share Data (Rs) Adjusted EPS CEPS BVPS DPS Growth Ratios (%) Total revenues EBITDA PAT EPS Growth Valuation Ratios (x) PE P/CEPS P/BV EV/Sales EV/EBITDA 2 2 Operating Ratios (Days) Inventory Days Receivable Days Payables day 0 0 Net Debt/Equity (x) - - Profitability Ratios (%) ROE Dividend Payout Dividend Yield

5 Bank fixed deposit v/s Narmada gelatin Bank FD Share price In 2008, If u had invested Rs60 in bank fixed deposit today u would have get Rs95 In 2008, If u had invested Rs60 in Narmada Gelatine today u would get Rs Dividends of Last 6 years which is Rs21 so Total amount is Rs171. 5

6 DIVIDEND HISTORY 6 dividend dividend Year Dividends Total 21 6

7 Why you should invest in Narmada Gelatin Stock is providing a good dividend yield of 3.38%. Stock is trading at 0.66 times its book value Company is virtually debt free. Company has good consistent profit growth of 28.59% over 5 years Company has reduced debt. Average P/E of Last 10 years is Now currently P/E is Average Dividend Payout for Last 3 years is 15.14%. Return on Invested Capital is 38.53% PEG Ratio is 0.12 which is more attractive. Altman Z score is 6 (those that have low probability of bankruptcy have a score of greater than 3.0.) 7

8 Axis Title Axis Title fundamental analysis of Narmada Gelatin Return on Equity DuPont Analysis of Narmada Gelatin Narmada Gelatin Net Income/Sales Sales/Total Assets Total Assets/Total Equity ROE EBIT/Sales Narmada Gelatin EBT/EBIT Net Income/EBT Sales/Total Assets Total Assets/Tota l Equity

9 Intrinsic Value Assumptions fundamental analysis of Narmada Gelatin Net Present Value based on DCF 3 years average free cash flow Rs Growth Rate For 1-5 years and 6-10 Years is 12% and 10% Respectively. Terminal Growth Rate is 0%. Discount Rate is 12%. Based on above Criteria Intrinsic Value Per share is Rs 245. Rs 245 Earning Power Value (EPV) After DCF, the second most reliable measure of a firm s intrinsic value is the value of its current earnings. This method is known as Earning Power Value or EPV. EPV = Adjusted Earnings x 1/R Rs 343 Narmada posted an EPS (earnings per share) of Rs 33 in FY13. If Naramda s profits were to stagnate and remain at Rs 33 per share going forward, and applying the EPV formula here, I multiply Rs 33 with 1/9.3% (9.3% is the approx. cost of capital for the company). Pricing relative to 10 year average P/E ratio True value investors, as Graham has prescribed, won t pay a price based on the stock s latest P/E or the company s latest earnings. They will take a much longer term view as long as 10 years. Last 3 Years Average EPS x Last 10 Years Average Rs 242 Narmada s average P/E ratio for the past 10 years has been around 9.47 times, while its last 3 years average EPS has been Rs per share. Based on the formula, Narmada s intrinsic value is coming to Rs 241 per share. 9

10 Graham number Graham number is the formula Ben Graham used to calculate the maximum price one should pay for a stock. As per this rule, the product of a stock s price to earnings (P/E) and price to book value (P/BV) should not be more than 22.5 i.e., P/E of 15 multiplied by P/BV of 1.5. Fair Value Price = Square Root of (22.5 x EPS x BVPS) Earning Per share = Book value Per share = 193 Rs 380 Applying this formula for Narmada, the stock s intrinsic value comes to around Rs 380 per share. Fair Value We have calculated 4 different intrinsic values for Narmada using 4 different methods. So much for the target prices As you can see from the above calculations, the target price isn t such a holy number and can differ based on the method used to calculate it. Fair Value Range = /4 = 303 Rs 303 to Rs 225 Assuming a margin of safety of around 20%, I would be comfortable buying Narmada s stock only at around Rs 225 or lower. This is around 25% lower than the stock s current price. 10

11 DISCLAIMER fundamental analysis of Narmada Gelatin Past performance is not indicative of future results. Neither my analysis nor my Report guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this Research Report. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned on this Report or on the show may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this Research Report. Before acting on information on this Research Report, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. 11