I was recently told about Surya Roshni, primarily due to our PM's push for using LED bulbs.
Surya Roshni started as a small tube making unit in the year 1973. Today, Surya has emerged as a vast conglomerate by being the largest in the steel segment and second largest in the realm of lighting. Surya has ventured into various other latitudes of success like fans, cold rolled strips and PVC pipes etc.
Company has a market capitalization of 450 Cr (and a debt of 900 Cr). Average net profits over last 5 years is 57 Cr (and average operating profits of around 200 Cr). Being a leader in both the primary segments, steel pipes and lighting, the earnings are healthy and maintainable 1.
What is bad about the company?
The company has a very low dividend payout. A part of the reasons is the need for regular plant upgradation (such as CFL plant in 2010, STIC in 2012, and again a 150 Cr expansion in current year, probably for LEDs and fans). Over the years, these huge capital expenditures have contributed little to shareholders. Until 2008-09, company used to have an asset turnover of around 5 times, with operating margins of around 7%. With these capital expenditures, the asset turnover has decreased to 3 times, and margins improved slightly to 8%. Overall, a huge dampner to the capital employed. Since these expansions needed a lot of debt, the net profits in the hands of shareholders have decreased over last 5 years, even though the operating profits have doubled.
What I find interesting?
The income statement of the company has many fixed-cost line items, primarily interest expense and depreciation expense. Ben Graham terms these as "companies with speculative capital structure." An increase of 15% in operating profits (which company has usually had) should cause an increase of 50% in PBT. With the push of government on LEDs, this can happen.
On the valuations front, the enterprise value of 1350 Crores and market capitalization of 450 Crores is not bad compared to the net block and the scale of operations 2. It does provide a cushion on the down side.
Overall, I might not deploy a high concentration on the stock and will monitor the biannually balance sheets to look for debt reduction and check on further expansions.