This article provides an in-depth fundamental analysis of Indian Toners and Developers Ltd, an Indian manufacturer and exporter of toners for use in printers and copiers.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Indian Toners and Developers Ltd Research Report by Reader
Q: First of all, thank you for your great services common investors like me. Just few days back only I heard about you (from Prof. Sanjay Bakshi’s tweets). I visited your website and read all the articles written by you. All these articles are outstanding. Indian Toners and Developers Ltd is the biggest manufacturer and market leader for Compatible Toners (Laser Printers) in India. I have short-listed Indian Toners and Developers Ltd because of the following qualities:
- Consistently profitable.
- Operates in an emerging consumer trend.
- Generates huge free cash flow every year.
- Debt free
- Earnings Yield above 16%, ROE above 19% and ROA above 15%
- Ability to fund growth with internal cash flows.
- No institutional/FII/DII ownership
- Illiquid and no analyst coverage
- Undervalued provides good margin of safety.
As per the DCF valuation model the intrinsic value of Indian Toners and Developers Ltd comes to Rs.160 per share, this provides a margin of safety of almost 50%. Indian Toners and Developers Ltd is also expanding the production capacity to 3000 MT by March 2015. In addition, they are holding cash and investments of 41 cr., which is almost Rs.51 per share. If we deduct this from CMP of INR 85, the price comes to INR 34. The EPS for 2013-14 is INR 14.33 That means we are getting a business with very profitable operations for a P/E ratio of 2.37. I think this Indian Toners and Developers Ltd is undervalued.
I am already holding Indian Toners and Developers Ltd and planning to invest almost 50% of my portfolio in this. I request you to kindly, provide your analysis.
Dr Vijay Malik’s Response
Thanks for your feedback and appreciation! I am happy that you liked the articles and found them useful.
Financial Analysis of Indian Toners and Developers Ltd:
You are right that Indian Toners and Developers Ltd has been growing consistently, though at a moderate pace of 10-15% year on year. The company has been able to improve its profitability (both OPM and NPM) over the years. It is a good sign.
However, if we notice the tax payout ratio, then we see that company is not paying tax as per the standard corporate tax rate applicable in India. An investor needs to analyse whether the company is getting any tax concessions/rebates from govt.
Operating Efficiency Analysis of Indian Toners and Developers Ltd:
Indian Toners and Developers Ltd has been able to improve its operating efficiency as measured by increasing fixed asset turnover ratio and inventory turnover ratios. Receivables days have been showing mixed trends. However, in light of the company being able to convert its profits into cash from operations over the years, it still seems ok. Nevertheless, an investor should keep a watch on the developments in receivables days position of the company in future.
Indian Toners and Developers Ltd has been able to convert its profits into cash from operations. Cumulative profit after tax (PAT) over last 9 years (FY2006-14) is INR 46 cr. whereas cumulative cash flow from operations (CFO) over the same period is INR 69 cr.
Indian Toners and Developers Ltd has utilized its cash generated from operations to fund its day to day operations, capex and investments in mutual funds. The company has mutual fund investments of about INR 26.5 cr. at March 31, 2014.
Indian Toners and Developers Ltd has prepared a significant war chest of cash. It remains to be seen what they do with it. Corporate world is full of incidences where managements have squandered the cash owned by companies. Developments related to deployment of cash need to be monitored closely.
Margin of Safety in the market price of Indian Toners and Developers Ltd:
Indian Toners and Developers Ltd is currently available at a P/E ratio of about 7, which offers good margin of safety as described by Benjamin Graham in his book The Intelligent Investor. Presence of significant amount of cash holding increases the margin of safety further.
I do not rely on discounted cash flow (DCF) method of valuation, therefore would not comment on your observations and inferences using DCF method.
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, Indian Toners and Developers Ltd appears to be a company growing at a moderate pace with good profitability, which has been able to improve its operating efficiency over the years. Company has been able to generate good amount of cash from its operations. However, an investor needs to study the reasons for lower tax rates before taking any investment decision about it. Investors should also monitor the trend of receivables days along with deployment of cash in future.
These are my views about Indian Toners and Developers Ltd. However, you should do your own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.