Welcome to the seventh issue of Safal Niveshak StockTalk.
After covering Balmer Lawrie & Co. Ltd. last time, this time I delve deeper into another small-cap company, Clariant Chemicals India Ltd. (CCIL). Before we dive deeper into CCIL, here is a brief overview of the sections of this report.
- About CCIL
- Safal Niveshak’s 20-Point Checklist
- Intrinsic Value Assumptions
- Financial & Market Snapshot
- “Should I Buy CCIL?” Checklist
CCIL is a 63% subsidiary of Clariant International, the Switzerland headquartered global leader in the field of specialty chemicals. CCIL’s presence in India began in 1947 with the founding of Sandoz Products. The acquisition of the Hoechst specialty chemicals business in 1997 brought Colour-Chem Ltd. and its subsidiaries into its fold.
Then, the acquisition of BTP in 2000 led to the integration of a fourth company BTP India Pvt. Ltd. into the group’s operations in India. In 2006, four of the affiliates were integrated into Colour-Chem Ltd. and the company was subsequently renamed Clariant Chemicals (India) Ltd. (CCIL).
CCIL is India’s leading specialty chemicals company and is the leading player in the pigments, textile chemicals, leather chemicals, and biocides (for paints) industries.
The company classifies its range of products into two segments: Intermediates and Colors (39% of 2011 sales) and Dyes and Specialty Chemicals (61% of 2011 sales).
Data Source: Ace Equity, Safal Niveshak Research
The former segment is a leading provider of organic pigments, pigment preparations and dyes used in coatings, paints, printing, plastics and other specialty applications. CCIL’s product portfolio meets the demands for automotive and home decoration paints, household detergents, packaging labels, colorant used in ink jet and laser printers. Its key market segments are trading and non-impact printing, electronic displays, all plastics including films, fibers and special applications, detergent coloration, cosmetics, aluminum finishing, automotive, industrial decorative and architectural paints and coatings.
The second business of dyes and specialty chemicals comprises of products for the textile, leather and paper industries and performance chemicals for personal care and industrial applications. Key market for CCIL’s products in this segment include apparel, clothing of all types and fashions, home textiles such as towels, drapes, linens and furniture fabrics, technical textiles for applications including medical, construction, sports and industrial, carpets including indoor and outdoor floor coverings and fabrics in hard wearing transport applications such as planes, buses and trains.
Keeping in mind the simplicity aspect that is otherwise missing in other company analysis reports you would come across, I’ve analyzed CCIL by answering 20 important questions that span its:
- Business performance,
- Financial performance,
- Management quality, and
- Competition.
Here is the complete 20-point checklist with my explanations.
Before we move ahead, here are the symbols that I’ve placed against each checklist point and that will tell you at a glance whether I have a positive or negative view on that particular point.
Indicates my positive view
Indicates my negative view
Let’s get started.
A. Business
1. Can I, in simple words, explain what the company does?
Yes. CCIL is India’s leading manufacturer of specialty chemicals and caters to textile, leather and paper industries among others. It also serves the needs of industries like automotive and home decoration paints, household detergents, packaging labels, and colorant used in printers through its second business segment of intermediates and colors.
2. Does the business have high uncertainty?
CCIL’s diverse nature makes it less prone to future uncertainty. So in a year when one particular segment performs poorly, other segments do well to even out the negative impact. Also, the specialty chemical products that CCIL offers are not cyclical in nature, so the company operates in a relatively less uncertain business environment as compared to other commodity-like chemical companies.
3. Has the business got an enormous moat?
CCIL’s long history of leadership position in most of its client industries provides it with a good (though not enormous) competitive advantage over competitors. Also, specialty chemical is not a commodity business unlike general chemicals, and thus provides the company a good pricing power over its competitors.
This is clearly seen from the gradual rise in CCIL’s average realization (revenue per unit sold) across different product segments over the past few years.
Data Source: Ace Equity, Safal Niveshak Research
4. Does the business generate strong free cash flow?
Yes. Despite some volatility, CCIL has consistently seen positive free cash flows over the past 10 years (except a negative figure in FY11, due to rise in working capital requirements). A combination of improving operating margin, and a high return on capital has led to a positive free cash flow performance in the past.
Data Source: Ace Equity, Safal Niveshak Research
5. What is the bargaining power of suppliers and buyers?
As we discussed above, specialty chemicals is not a commodity business and thus enjoys some pricing power. Moreover, CCIL is a long standing and well-known brand name, which combine to provide some bargaining power to the company over its buyers. However, since the company uses crude-based derivatives as raw materials, it does not have much bargaining power against its suppliers (of raw materials) and has to be a price taker.
B. Financial Performance
6. Does the business have a consistent sales and profit growth history and is there room for future growth?
Yes. CCIL has grown its consolidated sales and net profits (FY11 net profit adjusted for one-time gain from sale of assets) at an average annual rate of 11% and 15% over the past 9 years, which is a decent pace of growth. As for the future, I see the company maintaining a good growth rate – largely led by rising demand for its specialty chemicals.
Data Source: Ace Equity, Safal Niveshak Research;
FY11 net profit adjusted for one-time gain from sale of assets
7. Are EBIDTA margins higher than 15%?
No, but I am not concerned much on this account. CCIL’s business is such that generate sub-10% margins. But despite this, what is more important is that the company has been gradually improving the same consistently and has also earned higher return on capital over the years.
Data Source: Ace Equity, Safal Niveshak Research
8. Is its operating cash flow higher than net profits?
Yes. CCIL’s operating cash flow has been consistently higher than its net profits (FY11 net profit adjusted for one-time gain from sale of assets) over the past 10 years (except 2 years when operating cash flow has been marginally lower than net profit). I see this as a positive as it indicates a good management of the cash flow situation.
Data Source: Ace Equity, Safal Niveshak Research
9. Is the debt to equity below 0.5 times?
Yes. CCIL has been an almost debt free company for the past 10 years, and it’s current debt stands at near zero.
10. Is the current ratio greater than 1.5?
Yes. CCIL’s average current ratio has been 1.6 times over the past 10 years, which is a comfortable number and shows an overall good working capital management.
As a general rule, a current ratio of 1.5 or greater suggests that a company can meet its short-term operating needs sufficiently. However, a higher current ratio can also suggest that a company is hoarding assets instead of using them to grow the business. While this is not the worst thing in the world to do, it is something that could affect long-term returns.
11. Does the company have a good dividend history?
Yes. In terms of dividend payout (amount of dividend paid as percentage of net profit), CCIL has averaged around 66% over the past 10 years. This is a very comfortable level from a shareholder’s point of view. What is more, CCIL’s dividend yield (dividend per share divided by current stock price) over the past five years has averaged around 7%, which is a very good number.
12. Is the Altman Z score > 3?
Yes. CCIL is absolutely safe against any possible bankruptcy. Read more on the Altman Z-Score.
13. How capital intensive is the business?
CCIL’s average capital employed per year over the past 10 years has been around Rs 2.5 billion. Against this, in FY11, the company earned net sales of Rs 9.6 billion. This suggests that the capital turnover ratio has been around 4.3 times, thus indicating that the business is not capital intensive.
What other conclusion can we draw from this analysis? When capital turnover ratio is high, the company can afford to have a low margin, and still deliver an exceptional return on capital (which has been the case with CCIL). In case of CCIL, we already know that Capital Turnover is around 4.3. So, even if the company operates at a 6% margin (its net margin currently is around 11%), it can continue to earn a return on capital of around 26%! Not bad at all.
14. Has it got a high and consistent return on capital and return on equity?
Yes. CCIL’s average return on equity has been around 20% over the past 10 years, which is a reasonably high number, and suggests the company’s good capital allocation skills.
Data Source: Ace Equity, Safal Niveshak Research;
FY11 net profit adjusted for one-time gain from sale of assets
C. Management Quality
15. Is the management known for its capital allocation skill and integrity?
CCIL has been a great performer on the capital allocation front all these years. The management has guided the company well over the past few years, so the track record in terms of integrity seems fine. Even as far as the capital allocation part is concerned, we have seen how the company has continued to maintain a high return in equity (average of 20% over the past 10 years; 32% in 2011). So, overall, I’m comfortable with the management and its capability to guide the company in the future.
16. Has there been any substantial equity dilution in the past?
CCIL has never diluted its equity capital in the past.
17. Are management’s salaries too high?
I could not find CCIL’s top management compensation for the past.
18. What has management done with the free cash in the past?
CCIL has reinvested a lot of free cash back into the business. A good part has also been doled out to shareholders as dividends.
D. Competition
19. Does the business face high competition?
Yes, most sectors that CCIL caters to through its chemicals business face moderate competition.
20. Has the management focused on market share or profitability in the past?
A combination of both, which is good.
Before I move into calculating the intrinsic or fair value range for CCIL, let me make one thing very clear.
Intrinsic value isn’t a definite figure but just a ‘calculated’ value. In fact, the calculation of intrinsic value of a business mostly throws up a highly subjective figure. And this figure changes as estimates of variable like future cash flows are revised (given that the future is unknown).
Anyways, what I have done here is rather than arrive at a single intrinsic value figure for CCIL, I have calculated the value using 5 different methods and then arrived at a ‘fair value range’ for the stock.
1. Net present value based on a 2-stage 10-year DCF
The discussion about the calculation of net present value using a discounted cash flow model (DCF) can be found in the 7th lesson of my free course on investing – Value Investing for Smart People.
I have done a 2-stage DCF analysis for arriving at the intrinsic value for CCIL.
But as a reference, here is the formula for calculating the NPV:
Where:
PV = present value
CFi = cash flow in year i
k = discount rate
g = growth rate assumption in perpetuity beyond terminal year
TCF = the terminal year cash flow
n = the number of periods in the valuation model including the terminal year
I have calculated CCIL’s future cash flow for the next 10 years, assuming 2 different rates of growth in cash flows of 10% (years 1-5), and 8% (years 6-10).
As for the discount rate, I’ve assumed it at 15% assuming the average cost of capital for the company. My expected terminal growth rate for the company’s cash flows – expected growth in cash flow after 10 years and till eternity – is 2%.
Based on these numbers and after reducing the net debt (debt minus cash), the present or discounted value of future cash flows for CCIL is coming at Rs 672 per share, which is also the stock’s intrinsic value using this method.
2. Earnings 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. This value can be estimated with more certainty than future earnings or cash flows, and it is more relevant to today’s values than are earnings in the past.
The formula for EPV of a company is:
Here, ‘R’ is the cost of capital.
CCIL posted an adjusted EPS (earnings per share) of Rs 39 in 2011 (adjusted for one-time gain from sale of assets). Now, if the company’s profits were to stagnate and remain at Rs 39 per share going forward, and applying the EPV formula here, I multiply Rs 39 with 1/15% (15% is the approx. cost of capital for the company).
This gives me a value of Rs 258 per share, which is CCIL’s intrinsic value as per the EPV calculation.
3. 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.
Here, I have attempted to estimate the intrinsic value of CCIL using the company’s last 3 years average earnings and last 10 years average P/E ratio. So the formula is:
CCIL’s average P/E ratio for the past 10 years has been around 16.2 times, while its last 3 years’ average EPS has been Rs 40.4 per share (FY11 EPS adjusted for one-time gain from sale of assets). Based on the formula, CCIL’s intrinsic value is coming to around Rs 656 per share.
4. 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.
But why did Graham specifically used a P/E of 15 and P/BV of 1.5? Why didn’t he use some other numbers?
Well, he thought that nobody should be willing to pay more than the AAA bond yield at that time. AAA bond yield at that time was 7.5%. Therefore, AAA P/E was arrived at 1/7.5 or 13.3, which was rounded up to 15. Similarly he thought that nobody should pay more than 1.5 P/BV for a stock.
Graham insisted that the product of the two shouldn’t be more than 22.5. In other words,
(P/E of 15) x (P/BV of 1.5) = 22.5
Put another way:
(P/E) x (P/BV) = 22.5
Price(sqr)/(EPS x BVPS) = 22.5
Price(sqr) = 22.5 x EPS x BVPS
Take the square root of both sides, and you get the equation for the Graham Number.
Applying this formula, CCIL’s intrinsic value comes to around Rs 398 per share (FY11 net profit and thus EPS is adjusted for one-time gain from sale of assets).
5. Dividend discount model
As we have discussed in the DCF method above, the value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate or discount rate. Now, as per the Dividend Discount Model or DDM, dividends are the cash flows that are returned to the shareholders.
Hence, to value a company using the DDM, you calculate the value of dividend payments that you think a stock will throw-off in the years ahead. Here is what the formula is:
The modified formula for valuing a company with a constantly growing dividend is…
Given that CCIL has consistently paid higher dividends over the years, we use this ‘dividend growth’ formula for calculating the stock’s intrinsic value.
Assuming a discount rate of 15%, dividend growth rate of 13%, and the 2010’s dividend of Rs 30 per share (I have not used the latest year 2011’s dividend because it was extraordinarily high due to the one-time gain the company made on sale of some assets), and inputting these numbers in the above DDM formula, I get to an intrinsic value of Rs 1,500 per share.
Fair Value Range
I have calculated 5 different intrinsic values for CCIL using 5 different methods. So much for the ‘target prices’ you hear on business channels every day as if these were the holiest numbers!
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.
Anyways, based on the above calculated intrinsic values for CCIL, I can arrive at a ‘fair value range’ for the stock. Here is how I calculate it:
High End of the Fair Value Range = [Average of above four intrinsic values] Low End = [(Average of above four intrinsic values) – (0.5) x (Std Dev)]
Based on this, the fair value range for CCIL’s stock is Rs 460 to Rs 700. Assuming a margin of safety of around 25% to the higher end of this range, the comfortable buying price for CCIL’s stock comes to Rs 525 using the intrinsic values calculated above. However, considering that CCIL has around Rs 110 per share of cash on its books, and if I assume only 50% of this excess cash, I would be comfortable buying the stock at a price lower than Rs 580 (Rs 525+55), as the extra cash in bank adds to the stock’s margin of safety.
Given that CCIL’s current price of Rs 606 is just around 5% higher than my comfortable buying price, if I have surplus cash to invest, I would start buying the stock in small quantities (the stock’s 5% dividend yield, adjusted for one-time gain on sale of asset in 2011, will also add to my return).
The only point of technical concern regarding CCIL’s stock is its average daily liquidity (number of shares traded), which is on a lower side at around 6,300 shares. However, this is typical of small cap stocks, and one reason that makes this category more volatile than large cap stocks.
Warren Buffett once said, “Why is it that when departmental stores announce sale, people flock to the stores, but they do not put a dime when equities are on sale? Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”
So, as a sensible, long term investor, your aim must be to purchase a slice of easily understandable business with consistent & predictable earning flow. Overall, I believe CCIL fits into that category very well.
If one is thinking of making a quick buck, this isn’t the right company. But if one has patience, the stock has the ability to give good returns over the long term.
Data Source: Ace Equity, Safal Niveshak Research
Data Source: Ace Equity, Safal Niveshak Research
Data Source: Ace Equity, Safal Niveshak Research
Your feedback is important
So that was my take on CCIL as part of the Safal Niveshak StockTalk initiative. I’ve tried to be as comprehensive in my analysis, while trying to keep the report very simple. Let me know what you think of this report and the improvements therein.
Do you think I’ve missed mentioning something specific here? Can the Safal Niveshak 20-Point Checklist be modified or expanded any further? Do you find this report simple enough for your understanding?
Your answers would help me in making the Safal Niveshak StockTalk report, and the entire initiative, more beneficial for you.
Also, if you want to see your choice of stock covered here, just send me your request using the following form. If you can’t see the form below, click here.
[gravityform id=4 name=SafalNiveshak StockTalk title=false description=false]
Disclaimer: The author of this report, or any of his family members, does not own the stock(s) mentioned herein. The opinions in this report are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned or to solicit transactions or clients. The information in this report is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Thanks Vishal.
I requested you to do an analysis of Clariant chemicals in your stocktalk series part 6 (BLCL) and you have done it pretty soon! Thanks for doing such a comprehensive analysis.
And your analysis has reinforced my view on this company. I have long positions in Clariant and keep on adding to it on quarterly basis. Clariant is a stable, ‘boring’ company which should be the part of core portfolio. Looking forward to more such analysis of boring* companies
* – Boring is a term used by Peter Lynch (and investors who follow his advise) 🙂
Thanks for your feedback, Dev! Well, CCIL had the maximum number of requests (including yours), so I covered it this time. StockTalk works on a mix of readers’ requests and my analyses of companies. So let me know which other ‘boring’ companies you want me to consider for future coverage. 🙂
A few other ‘boring’ businesses which I would like you to analyse –
SRF
Bajaj Holdings
Tata Investments
Sintex
EIL
BEL
Thanks for your suggestions, Dev. Will try to work on these for the future issues of StockTalk.
Hi Vishal,
Excellent analysis as usual. I have one question in Dividend discount model regarding dividend growth rate which seems very aggressive.
You are applying dividend growth rate of 13% till perpetuity while assuming cash flow to grow by 10 % for first 5 years and 8 % thereafter. Then at some point of time in future dividend will outgrow cash flow.
Since in DDM growth rate is assumed for perpetuity, it should always be less than growth rate of economy.
Thanks,
Dinesh
Hi Dinesh, thanks a lot for the feedback. I generally take a 10 year growth assumption while calculating IV using the DDM model. CCIL has grown its dividends at an average annual rate of around 20% over the past 10 years. So a 13% assumption for the next 10 years seems reasonable I believe. The perpetuity factor with respect to cash flows lies in the terminal growth rate (and not in then next 10 years growth rate), which I’ve assumed as 2% for CCIL. And as you rightly said, if I were to calculate the DDM using the perpetuity number, the growth assumption won’t be more than 2-3%. Regards.
Thanks Vishal for the prompt reply.
I believe this is how you arrived at 1500 intrinsic value using DDM.
Intrinsic value = Dividend per share/(Discount rate – Dividend Growth Rate)
Intrinsic value = 30/ (0.15-0.13) = 1500
Since there is no mention of number of years in the above formula it would treat it as perpetuity.
For limiting to only 10 years formula formula should be similar to cash flow with 2 stage DCF.
First 10 years with growth rate as 13% and terminal growth rate as 2%.
This will give Intrinsic value based on dividends as Rs 466.
Can you please clarify if I am missing something.
I am novice in equity investing and still need to do lot of learning and really appreciate all your efforts and willingness to share which has helped readers like me a lot.
Thanks,
Dinesh
Yes you are absolutely right, Dinesh! I have however not calculated the dividends till perpetuity but has assumed the same for just the first 10 years. So have excluded the calculation for terminal rate. However, this discussion leads me to the fact that if I use the formula for perpetuity (like I do for DCF), this would add to a stock’s margin of safety, and thus would be a better idea (than what I’m currently doing).
So thanks for your idea. As you see, even I’m learning the process and would not consider myself as a perfect valuer of stocks. Any in any case, you don’t seem like a novice. 🙂
Really appreciate your thoughts as they help me in making the entire analysis even better. Regards.
Hi Vishal,
Good post on clariant. Even i continue like the company. The parent seem to be more bullish on the business , but the indian counterparts did not show a similar feel in the AGM.
Also they recently the parent has taken a small stake in Asahi Songown colours which also looks a high risk high return bet in this sector.
The downside can be limited to 550 🙂 is what i feel its just that this is a stock which will test patience.
Hi Nooresh, thanks for your feedback! Agree with your view about Asahi Songwon. Also agree that CCIL – like all ‘boring’ companies – is for the patient ‘few’.
Hi Vishal,
I am really impressed with your analysis on CCIL also appreciate the way to calculate fair price of individual stock but only thing that is going against CCIL is that it has underperformed as compared to Sensex. That is the problem with fundamental analysis whatever may be performance of the company finally market decides the price for the stock. Also in India we can not believe in audit figures like profit/loss, income etc. as there is no transparency in the entire system. So I advise to use technical analysis also rather than to wait for years and years holding a non-performing asset.
Thanks for your feedback and suggestion, Rajendra! While I won’t be able to pinpoint specific reason CCIL has under-performed the Sensex in the past, one factor could be that the company has turned around only recently, and thus stands a good chance to see a re-rating in its valuations in the future.
But there is one important thing that CCIL’s stock versus Sensex chart does not show – the large amounts of dividends that CCIL has given over the years. If you just include all the dividends the stock has given over the past 10 years, its average annual return during this period stands at 16.5% against the Sensex’s 18%. If you exclude the dividend however (as the stock price comparison chart shows above), CCIL’s return is lower at 13%. So including the dividend will all a lot to the stock’s past returns.
As for your suggestion about using technical analysis, sorry but I am not a believer in the same. I just go by how mush a stock is trading at as compared to its intrinsic value, and then take a call whether to invest in it or not. Of course, you can never be sure about the sanctity of audited numbers of companies, but that’s the reason it pays to go for businesses that are simple (and thus difficult to manipulate in terms of accounting) and managements that are ethical.
Hi, I am highly impressed with your analysis of Clariant Chemicals. Though it is late to reply, i just came across your analysis while i was searching for clariant india in the net.
I was just analysing the impact of recent announcement by clariant parent on selling the part of the business to SK Capitals.. so, not sure about the indian subsidy and investments to this.. if you have your updated thoughts on this, it would be greatly helpful to all the readers who gone thro your post.. hope you will do.. Thanks.
HI Vishal,
Good analysis. Could you share your views on IDFC, is it good buy at current price.
Thanks
Salil
Hi Salil, thanks for your feedback! Will try and work on IDFC.
Hi Vishal,
Once again wonderful analysis done by you for a company which is not in so much lime light. This StockTalk No. 7 posted for a gap of 40 days. Kindly try to reduce the interval. One more thing this time no PDF attachment for the StockTalk has been given. 🙂
Vivek
Hi Vivek, thanks for the feedback! Well, blame it on my illness and work-in-progress on some other projects (like the upcoming Financial Planning course) that led to this gap between two StockTalk issues. As for the pdf, yes it’s missing. You can create one at your end by simply copying the entire report in a word file and then printing as a pdf. 🙂 Regards, Vishal.
Hi Vishal,
I was going through Clariant India’s consolidated cash flow statement in the annual report for the year 2011.
Net cash from operating activities 2145.32
Purchase of fixed assets (4884.71)
Free Cash Flow = 2145.32 – 4884.71 = -2,739.39 ( -274 Million Rs.) which is negative FCF while in the FCF chart above its around 1200 Million. Am I missing something here?
Hi Rahul,
Indeed it was a mistake on my part :-(, which I have now corrected in the report above. However, it won’t impact the DCF figure because I have taken an average, normalised number for the same. Apologies for the inconvenience!
Regards,
Vishal
//blame it on my illness //
vishal,
health is wealth man….take care of your health.
hopefully our june showers show pretty early.
I also requested for IDFC ..not urgent as markets seems to witness steep downfall.
Thanks Sri! Yes, IDFC is pending…but I always doubt myself while analyzing financial companies. 🙂 Will try to cover that soon anyways. Regards.
No problem Vishal,
I still confused here, I thought these charts come directly from Ace Equity software, so was the number wrong in ace equity?
Yes Rahul! While I use the annual report figures for making my intrinsic value calculations, I had been using Ace Equity for making the charts. While rechecking the numbers last week, I realized to my horror that their FCF calculation was all wrong (other numbers are right though) as they were using the incorrect formula!
I have talked to their software development head, and they are now rectifying the formula.
The big lesson here is – while any external software (or an external source like Safal Niveshak :-)) can be of great help in identifying good companies in a snap, it always pays to read the annual report and do your own due diligence before finalizing on a company.
Wow, tell the software development head that I am sending my invoice for finding out this critical bug in their software 🙂
LOL, Rahul! I’ll rather ask for a bigger discount on renewal. 🙂
I am sure you will have your reasons, but I have a stupid question. Although I do not follow this, but wanted to check with you. Why are we looking at a company for value investing with it’s price at around 17 times (some websites show it as 14) it’s earnings?
It’s indeed an important question, Mansoor! Value Investing has 2 angles to it – Graham-style (pure value, extreme discount to intrinsic value) and Fisher-style (pay a premium for growth). In fact, the style that Buffett has followed over the years is 85% Fisher and 15% Graham. That is also the case with CCIL – it’s fine paying a 17x for a company that has a solid business model, clean balance sheet, and a great dividend yield. And then, the 17x you see is on a low earnings base after a weak last year. Adjusted for this weakness, the stock would be trading at a cheaper P/E multiple.
Hi Vishal
Thanks for the excellent analysis of Clariant Chemicals. Your 20 point checklist is very exhaustive. I suggest that along with 20 points you also include a additional point which summaries or includes all the reasons not to buy stocks or the major risks with the company. I know that you are already including this under respective heads and your red colors highlights it. But personally I found that when you read all the risks under one head, someone can take call much more easily.
Hi Anil, thanks a lot for your feedback and a great suggestion. Will try to incorporate the same in the future issues. Regards.
This is one stock that i was looking at from past 6 months, and i had a price in my mind for it, I was comfortable paying 550 for the company and it almost came to 555, but i waited for it to come to 550 which never happened, Sometimes having strict disciplined on I Value of company may cause you small losses 🙂 so i changed myself and pick up the stock if its close to my buy value like i did in the case of Opto Circuits India.
Hi Vishal,
Had come across your site while researching Opto Circuits myself and liked it immediately. Also then noticed Clariant which is related to another company ive liked for a long time(iniatially reccomended by a friend ) ie Asahi Songwon Colours – its currently at around 5 times earings and close to 1.1 times book. Been growing @30% avg over last few years and is expanding capacity( 2013). Though recently margins may have slightly come down, still looks like there is value notwithstanding recent price increase ( RONW etc is @appx 20%. Since its related to Clariant ( Clairant is its customer and stakeholder) thought id check if you had any comments on it …
austin.
HI
ONE CONCERN ABOUT CLARIANT. ITS SALES HAVE NOT SHOWN ANY GROWTH SINCE LAST FOUR YEARS. CAN U GIV SOME INSIGHT ABOUT FUTURE GROWTH EXPECTATIONS.
THANKS
Vishal.. Been trying the calculation based on the balance Sheet…
I had used the excel which was included in the value investing course… Seems some where there is a mistake in my calculation .. especially DCF.. Other ones I am able to get it ..
Anyway i will check and come back with queries…
Hi Vishal
First of all thanks a lot for giving idea of Tata Investment corporation, I was not even aware we have such companies listed in India. Secondly your series on Warrant Buffet letter is very informative.
Now coming to Clariant Chemicals, I think we are missing some important points in this company and current valuations appears to be crazy to me (atleast going by historical performance).
1) First of all, Sales growth over 2007-11 is merely 2.6% and even this nominal growth has been aided by exports (5.5% CAGR) and domestic sales growth was nominal (2 % CAGR). Now my guess is that it is possible that entire exports growth is driven more by rupee depreciation than volume growth or ASP. Entire growth in profits was lead by margin expansion and othe one time income. In 2011 annual report under MD&A, I could not find any indicator from management which will suggest that growth will pick up going forward. Now it will be too risky to assume that over next 5 years they can grow their profits on cost cutting basis without increasing topline.
2) Secondly, I think it is wrong to consider sales CAGR over 2003-11 as basis for our assumptions in DCF, as it appears that company went into some fundamental change sometime in 2006 (I guess mergers of all its pvt companies with the listed company), because of which sales increased by 2.2x in 2006 or its entirely possible that I am missing some growth triggers.
3) Even considering ASP growth without taking volume into consideration may not be correct. Yes, ASP has increased by 18% for intermediate & colors over 2007-11, but volumes have declined by 13% CAGR. Actually, I think (not sure) it may not be right to do any analysis of volume or ASP in this particular business, as the products are constantly changing every year.
Now compared to Clariant Chemicals, I think stocks like NHPC is in a better position to give handsome returns to investors. NHPC is trading at discount to book value (20% discount), PE multiple of 7.5x (PE to Cash EPS might be better indicator which is merely 7.4x) and dividend yield of around 4%. Compared to Clariant Chemicals, I think we can be more confident in NHPC case that over next 5 years profits will grow at more than 5% CAGR and some re-rating in stock is possible. In case of Clariant Chemicals, I do not see any acceleration in growth in the near future nor any stock re- rating from current level of 16-17x PE.
Let me know if I am missing any critical points.
Thanks for your inputs on CCIL, Anil! I haven’t studied NHPC in detail so won’t be able to comment in it as of now. Regards.
appreciate the hard work behind. apart from research on stock, concepts, methods and rationale behind using a metric has been explained. really a great commitment towards users of your research
Clariant India’s parent has decided to sell 3 of its non-core businesses for close to $500 million. On the face value, the news seems positive as it would allow Clariant to focus more on high margin high growth businesses. It is also expected that there may be a special dividend announcement of Rs 20 – Rs 30. But flip side is that there would be a fall in sales & profit (EPS) figures. Your thoughts?
Dev, you’ve already provided the answer here. 🙂
Yes Vishal… Just tried clearing some confusion in yesterday’s post.
But until and unless company comes out with some more information, it would be a wait and watch for me. 🙂
very good analysis
Vishal, the partial sale of CLNINDIA business, does it not change your views on your stock talk? or its values? the way you have mentioned about HMC, so just checking would it not be good to provide a update the Stock talk about your views about any major changes “Major”.
The stock is gridning lower and lower. Do you feel it might be a good time to start accumulating this stock.
Also, if we consider 35% business sale, stock has corrected much more than that. Please give your updated views.
Is there a corporate governance issue in Clariant India of sell of some of its asset. Company has not clarified the valuation method used to arrive at the figure. Any thoughts from the existing shareholder.