One of my friends recently mentioned about Vardhman Acrylics. The company manufactures Acrylic Fibre (AF) - a sort of commodity product, but with only 5 major manufacturers in India. What attracted me about the company were its valuations.
The company earns a recurring interest income of around 6 Crores. The average operating profits (i.e. excluding income from investments) of the company over last 5 years have been 39 Crores (after depreciation, but before tax).
For a moment, lets ignore all the investments on balance sheet (of over 200 Crores) and just compound the above two revenue streams:
Interest income: 6 Crores x 10X = 60 Crores
Operating income: 39 Crores x 8X = 320 Crores
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TOTAL VALUE: 380 Crores
The company currently has a market capitalization of Rs.197 Crores and is almost debt free. It looks a fifty-cent-dollar-bill based on both the earnings as well as balance sheet.
Catches
The biggest problem with the company is that it has never paid dividends. Over last 5 years, the company has earned over 170 Crores. Neither of these profits have been distributed as dividends, nor redeployed into the business. All of it has been invested into bonds and mutual funds. As per the latest balance sheet, the company has over 233 Crores of investments. The most stressing point of Graham has been on dividends. Rarely have the companies rewarded the investors by retaining the profits with themselves.
Another point of concern might be the high value of related party transactions. The company is promoted by Vardhman Textiles, which holds ~75% of company's equity. Around 50% of the sale (255 Crores of the total sales of 510 Crores) is made to this holding company - Vardhman Textiles. Though it is risky from the pricing point of view, it assures the company of 50% of its current sales. The pricing of the sales appears to be unbaised.
Triggers and Developments
Few developments which make the stock interesting are:
- Recent buy-backs: The company has bought back around 1.55 crore shares @11.50. With the increasing interest income and decreasing number of outstanding shares, the EPS should increase going forward.
- Stability in exchange rates: Since 2011-12, the company has been incurring an average 4 Crores of exchange fluctuation losses on ACN import. This can normalize going forward.
- Promoter buying: Vardhman Textiles has been consistently increase its stake in the company over the years. After the recent buy-backs, I wish and hope for a maiden dividend in future.
The recent quarterly results have not shown the interest income in other income. I will try to get more info around it. Overall it is a very interesting stock to track.