BBL is directly dependent on power sector and industrial activity for its business and expectantly the company is going through tough times, with them declaring losses in last 2 quarters. In these tough times company has invested in upgrading its plants, has done optimization of its factory lines etc to enhance the productivity and reduce costs.
A look at financials of the company indicates that management has been effective in employing capital, average RoE is around 20% for last 5 years. Company has no debt and in fact has substantial cash and investments on its books.
What makes the stock interesting is the cash and investments it has on its books. As on FY 12 the company has following investments:-
- 0.21 Crs shares of Siemens India Ltd, Present Value Rs. 114 Crs
- 0.051 Crs shares of HDFC Ltd, Present Value Rs. 41 Crs
- 0.033 Crs shares of HOEL Rs.2. 5 Crs
- Other investments in HDFC Bank, ICICI Bank etc of around Rs. 3.5 Crs
- Around 25 Crs in Liquid funds and Cash
Total value of these investments and cash is around Rs. 186 Crs. The present EV of the company ( Debt as on H1 FY12 of around 95 Crs) is Rs. 385 Crs. Excluding cash company is definitely quoting at really cheap valuations.
The investments + cash and history of management not blowing away these away limit the chances of permanent capital erosion.
Any uptick in the power sector will automatically lead to jump in sales of the company and with an RoE of 20% BBL can benefit significantly.
So is this stock an investment recommendation?
Seems YES from above, but i wont be investing here. My reasons for not investing are given below.
Sweets kept in open attracts a lot of flies, which in turn can spoil the sweet :
No matter the past track record it is imperative to understand how the business environment itself has changed. Imagine yourself to be a CEO of a large engineering MNC with focus on power sector. It is clear to you that demand in developed economy has slowed down and India though its present problems still is one of the largest market to enter. You will look at RoE/RoC numbers of companies like BBL, BHEL etc and conclude that money can be made in this segment . So you would be keenly observing India, you will have some small operations in India and then when you see signs of improvement will enter the market big time.
If viewed in this landscape it can be seen that mid-sized companies like BBL will be the first ones to get hit. With limited balance sheet strength it will difficult to compete with MNC's in improved environment wherein a lot of players can come and hurt BBL both on quality and pricing.
Although it can be argued that company has done well even after liberalization, but the mega investments in power and the recognition that investments are required in power have come to notice only since 2007-2008. Since, that point a look at sales growth shows how company is struggling.
For a mid-sized company having a moat is critical for it to survive. This can be done by operating in a niche or by innovating new products or by growing at a rapid clip by eating competition BBL seems to be failing on all these fronts. There innovation has been limited to productivity measures which wont take them beyond a point
To conclude, when BBL is looked through the lens of a Business analyst who uses Porters 5 force model and not just financials things don't look so rosy here. As Prof. Bakshi says, the right sequence to look while analyzing a stock is Business, People and then Price.
Most of us including me as in this case did the opposite: Price, People and then Business and often fall into value traps.
Regards,
Saurabh
PS- What am i doing here? I was influenced by the first part of this blog and had taken a position here. As of now I have reduced my holdings significantly. I plan to attend the EGM on 11th March to try and get answers to my above apprehensions.
