Today I studied Dynemic Products Ltd, which can be an example of cigar butt investing.
This company has a market capitalization of 16 crores. It is "into manufacturing of food color, lake color, D&C colors, salt free dyes, dye intermediates which is used as an essential ingredient of food, drug, cosmetic, personal care and FMCG industry."
This is a highly competitive business due to its commodity nature. Company's 10-year-average growth rate is only 17% in-spite of a major expansion in 2008 (company came up with an IPO in 2006). There have been constant margin pressures over last few years and the operating margins have fallen from 16% to 11% levels. The 10-year-average profit growth rate has been only 14.58%.
In 2013 annual report, the company says the lower margins are "largely attributed to MEE plant, which has incurred Rs.4.57 cores on working capital this year and Rs.47 lacs on fixed assets which is a step ahead for pollution control and GPCB norms."
The MEE plant is a regulatory requirement and impacts the company negatively as unorganized/small competitors are not required to comply with it.
On the valuation side, the stock looks over-beaten. The company came up with an IPO in 2006 at Rs.35 (valuing the company at 39 crores and 10 times its earnings). The company has paid consistent dividends of around 1.5 crores each year and provides a dividend yield of 9%. The current price is around half its book value and the rupee depreciation should be a big positive for the company (as 70% of the company's revenue are from exports).
I would still give the company a miss primarily because of slow growth, low return ratios, lower booked depreciation and highly volatile quarters. Though the stock returns look attractive in micro-caps, I would prefer Gulshan Polyols over it.