This article provides fundamental analysis of Premco Global Ltd, a manufacturer of elastic and non-elastic narrow fabric, tape and webbing to be used in the different types of cloth-wears.
Premco Global Ltd Research Report by Reader
Q1: Sir, please go through my stock analysis.
Premco Global Ltd: – Company is mainly engaged in the business of manufacturing of Woven & Knitted Elastic Tapes.
- Sales Growth – 15 % 10Year CAGR. 18% 4Year CAGR
- OPM: – 13 % 10 Year CAGR. 17.5 % 4 Year CAGR. OPM increased from 7 % to 25 % in last 5 years due to shift of focus from domestic to export market, which is high margin business.
- NPM: – 5.5 % 10 Year CAGR, But in last 3Years it has increased from 9.7 % to 13.7%
- D/E = 0.18
- Tax paying with more than 30% tax rate.
- CFO > Net Profit
- Dividend paying company
- Promoter holding 63.2% No FII holding
Premco Global Ltd is targeting the new production capacities of at least 20 % higher from existing capacities. The prices of Raw Materials (oil and rubber) have fallen sharply. Share has risen from 90 to 370. Premco Global Ltd is currently trading at 270 (with PE of 11) in lower circuit. This share trades many times in circuits only. At current price of 270 earnings yield is 10.1%.
Q2: Sir, share your views regarding Premco Global Ltd.
- Sales increasing 13% cagr for 10years
- Operating profit 23% CAGR for 10years
- OPM is increased from 10to 21%
- Tax rate is stable @35%
- Interest coverage increased from 3 to 12 in last 10years
- Debt is consistently reducing
- Cash flow is positive.
- Cash flow from operations in last 10years = INR 25 cr against net profit INR 20cr in the same period.
- Creation of value:Net profit increase = INR 20cr. Market cap increase = INR 102 cr. So creation of value = 5
I found fundamentals are good. Please share your views.
Dr Vijay Malik’s Response
Thanks for writing to me! Premco Global Ltd seems to be a very popular company. I have received many queries about it.
I appreciate both of you for the good analysis you have done and pointed out important features of Premco Global Ltd.
Financial Analysis of Premco Global Ltd:
As per the financial performance of Premco Global Ltd, it was languishing with a sluggish business until FY2012 when it was growing at a very moderate rate with poor profitability, which was declining year on year. However, since FY2013 Premco Global Ltd seems to have revamped its business and started on a growth path.
Since last 2 years, sales growth has picked up and profitability improved multiple folds, as has been rightly observed by you. Company is paying taxes at a good corporate rate, is converting profits into cash from operations as noted by you that cumulative CFO of last 10 years (2005-14) is greater than cumulative PAT for the same period.
Operating Efficiency Analysis of Premco Global Ltd:
Premco Global Ltd has been improving is fixed asset utilization efficiency, which is visible through increasing fixed asset turnover ratio. However, if we see the receivables days and inventory turnover, then we see certain concerns.
Receivables days have been increasing since last 4 years, which means that Premco Global Ltd is either offering extended credit terms to buyers to garner business or customers are delaying payments despite Premco Global Ltd demanding its dues. An investor should analyse the buildup of receivables outstanding more than 6 months in the annual report of successive years to analyse whether Premco Global Ltd is facing difficulty in collecting its dues from customers.
Declining inventory turnover is another area of concern, which indicates that Premco Global Ltd’s operations are becoming working capital intensive than before. An investor should analyse whether Premco Global Ltd has launched any new kind of products, which take longer into processing that might have increased its cash conversion cycle. If no, then the investors should keep a close watch on the operating performance in the future to see signs of any further weakness in working capital management of the company.
Reported numbers do not reflect any other major weakness. A growing company would require funds to invest for its future growth, therefore, low or no dividend should not be an issue if growth is intact. Moreover, in Premco Global Ltd, the dividend payout ratio is declining but the absolute dividend amount is increasing.
Premco Global Ltd is a small cap firm. Many a times small cap firms do not have much liquidity in their trades, therefore, circuits are common. However, an investor should keep a very long-term time horizon and should not be worried about current low volumes in any good stock.
Warren Buffett said in his “Owner’s Manual” to Berkshire Hathaway shareholders:
“In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies”
You may read more about Warren Buffett’s ownership principles in this article: 11 Investing Principles revealed by Warren Buffett to Berkshire Shareholders
Overall, Premco Global Ltd seems to be a company, which has revived itself since last 2 years after running a mediocre business for long. It has been growing well with improving profitability. However, its working capital management is showing certain concerns, which should be monitored by investors for future developments.
Margin of Safety in the market price of Premco Global Ltd:
Premco Global Ltd is currently available at a P/E ratio of about 10, which offers low margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
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
These are my views about Premco Global Ltd. You should do your own analysis before taking any investment decision about Premco Global Ltd.You may use the following steps to analyse the company: “How todo Detailed Analysis of a Company“
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 in my portfolio.