This article provides fundamental analysis of Acrysil Ltd and DHP India Ltd
Analysis of Acrysil Ltd
Q: Dr Vijay, I like the content on your blog and the in-depth stock analysis.
I am analyzing a small cap company Acrysil Ltd that is into manufacturing of kitchen sinks. Acrysil’s sales for FY 2014 was Rs 104 crore and current Market cap Rs 236 crore. Last 10 year Sales CAGR is 26% and PAT 64%. PE at 26 times is on the higher side compared to our checklist but company’s growth in future looks promising both in domestic market (with all focus on housing and related products) as well as from point of view of Export markets where Acrysil supplies premium products though their overall share is small.
Current margins are low but likely to improve with growth coming. Net profit margin is in the range of 6 to 7%. I do not have much information on management of the company as it is very small company and there is not much information available in public domain and haven’t seen any analyst reports.
Shall be grateful to get your detailed analysis on Acrysil and whether it can be a good investment candidate for the medium term. Regards.
Dr Vijay Malik’s Response
Thanks for your feedback! I appreciate the way you have analysed Acrysil Ltd. You have analysed most of the relevant factors and summarized it well.
Financial Analysis of Acrysil Ltd:
Sales have been growing at good pace. Profitability, however, is on the moderate side. Operating profit margins of 16-17% and net profit margins of 6-8%, thought, seem decent, are lower compared to historical levels. Company’s tax rate is consistently at 23-26% levels. An investor should check whether Acrysil gets any tax rebate for its business.
Cumulative net profit and cash from operations of last 10 years is almost at similar levels, indicating that cash is not stuck at the end of customers.
Operating Efficiency Analysis of Acrysil Ltd:
Operating efficiency parameters are improving over the years. Asset turnover, receivables days have shown improvement since last 4-5 years. Inventory turnover is stable with growing sales. All these parameters show healthy working capital management and indicate efficient management qualities.
Company has been doing capital expenditure from a mix of internal accruals and debt, which is not bad. However, debt levels are increasing year on year. Debt to equity levels have increased to 0.9 in FY2014. Interest coverage ratio, though, seems within comfortable limits currently, might become the cause of concern, in case Acrysil is not able to maintain its healthy growth and profitability.
Management seems good as it has been sharing the fruits of growth with shareholders and has increased dividend payment in line with growth of profits. Dividend payments have increased at 25% CAGR in last 7 years.
Overall, Acrysil seems a good business. Market has also recognized it and given it high valuations. At current P/E of 26, it is no longer a hidden value stock. At current valuation levels, it does not offer any margin of safety.
I believe that an investor can find other attractively priced opportunities in current markets. However, you should do your own analysis before taking any investment decision about Acrysil Ltd.
Hope it helps!
Analysis of DHP India Ltd
Q: Hi Vijay, DHP India Ltd is a Manufacturer of LPG Regulator (Liquefied Petroleum Gas Regulator) and its accessories. DHP started as trading company but evolved into a manufacturing company, which substantially improved their bottomline. The company is export-oriented company and manufactures rubber hoses for gas connections and Gas cylinder regulators for both industrial and domestic use.
Company is debt free, dividend paying, has great cash flows, commands an 5 yr Average RoCE of around 33% and 5 yr average RoE of 25% and RoIC of 38% and is available at 6.5 PE, has grown (since Mar 09) at a CAGR of 35% topline and 75% bottomline and is the only listed play in its sector.
Kindly share your views on it. Regards,
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of DHP India Ltd:
Financials of DHP India Ltd reflect that it is growing at a good pace of 25-30% per annum without compromising its profitability. Operating profit margins are maintained at 23-24%. Similarly, net profit margins are also maintained at 13-15%, which are good for any industry. Company is paying tax at a rate of 33%, which is again a good sign.
DHP India Ltd seems to be facing some challenges in realizing cash from its buyers, as cumulative cash flow from operations (CFO) of last 10 years (2005-14) is INR 18 cr. against cumulative PAT of INR 23 cr. for the same period. However, the cash collected is still sufficient to fund its growth as DHP India has been using its internal accruals to fund its capacity expansion without relying on debt.
DHP India has minimal debt of INR 2 cr. against equity of INR 26 cr. This strong capital structure would enable the company to tide over troubled times without a lot of trouble.
Company has been looking at sharing benefits of growth with its shareholders as it has increased its dividend outgo since last 2 years.
Margin of Safety in the market price of DHP India Ltd:
Company is available at a low P/E ratio of 4.88, which offers good margin of safety for investors.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, DHP India Ltd seems a company, which is managing its growth well without leveraging its balance sheet. Profitability margins are maintained. Capacity growth is funded by internal accruals. Company is available at attractive price with good margin of safety. However, whether the same growth story would keep continuing in future, is anybody’s guess. Moreover, even if the growth story continues, whether the same would get reflected in stock prices, is again anybody’s guess.
I believe that you have identified a good company. However, you should take any investment decision post your own research and keeping the above factors in mind.
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above, except DHP India, in my portfolio.