Cash Rich Companies

4. Parekh Aluminex
Parekh Aluminex manufacturers and exports aluminium foil containers for companies in the packaged food industry. Though small in terms of market capitalisation, it is one of the largest players in the organised sector. Over the past five years, the company has aggressively increased the scale of operations thereby achieving sales growth of 60% when compounded annually. Despite the rise in input costs, the company has managed to maintain margins above 17%. It has a debt equity ratio of one, which looks comfortable given its healthy generation of cash flows. The company gives a return on capital of 14.4% and a return on equity of 15.9. With 10-12% growth in the Indian food industry expected to sustain, earnings momentum for Parekh Aluminex remains intact.

5. Kemrock Industries
Gujarat-based Kemrock Industries is India’s leading manufacturer of composite materials such as fibre-reinforced plastics (FRP) and glass-reinforced plastics (GRP). In collaboration with Hindustan Aeronautics, the company has successfully launched India’s first-indigenously manufactured carbon fibre. It plans to double the carbon fibre capacity to 800 tonnes per annum by the end of this year. In its efforts to create a technologically superior product range and significant capacities, the company has leveraged its balance sheet.
In the last two quarters, the company’s profits jumped 63% y-o-y. This underlines Kemrock’s ability to manage high leverage. Since composite products are substitutes for steel and aluminium, their demand is expected to grow in double digits in the coming years. This will ensure Kemrock’s revenue growth.
In addition, RPM International, which already holds 18.3% stake in Kemrock, is coming out with an open offer to acquire a further 20% stake at 539 per share. The offer price is around 5.5% higher to its current market price.

6. JBF Industries
JBF Industries is one of the world’s largest polyester chip manufacturers with a capacity of nearly one million tonnes per annum. After initially expanding its chip capacities, the company moved up the value chain to manufacture filament yarn. It is now planning to backward integrate to purified terephthalic acid (PTA) - a key input for polyester. The company has also set up a wholly-owned subsidiary in UAE to produce bottle grade PET chips and polyester film. Although the benefits of backward integration will be available only from 2014 onwards, JBF’s current low valuations make it an attractive long-term investment.

7. Anant Raj Industries
The company is a mid-size, real-estate player with the commercial segment accounting for a majority of its portfolio. It recorded a 77% growth in top line backed by strong sales due to asset monetisation in the NCR region and regular residential growth during the quarter ended March 2011. But net profit fell 1% due to higher tax provisioning.
With a debt-equity ratio of 0.22, the company fares well among its peer group. Despite a strong momentum in its leasing business across cities, sustainability of earnings growth will be crucial in the coming quarters. The stock also looks attractive based on P/E valuations. With an industry price-earnings ratio of 20, Anant Raj trades at a P/E of 12. Investors with a reasonable risk appetite can take exposure to the stock for at least 2- 3 years.

8. ERA Infrastructure
It is a mid-size, integrated player with a pan India presence. The company is present across infrastructure segments such as airports, power, roads, and railways besides real estate. It has reported over 50% growth in the bottom line backed by execution of a strong order book in the past five years. Era’s current order book size is nearly three times its annual sales. This offers strong revenue visibility. Execution of projects is key for future growth. Increasing exposure to segments such as BOT (Build Own Transfer), which have a regular payment schedule, can insulate the company’s earnings in the coming quarters. The company looks attractive given its prospects, but investors should keep a tab on its earnings growth to minimise the risk on returns.

One of the strategies to find out companies which have grown their reserves and surplus account significantly over a number of years.

1. A significant reserves position ensures that companies will not only be in a position to cope with losses in the short term, but also be able to expand through acquisitions if needed. This makes reserves and surplus-based valuations a little more appropriate during a turbulent economic scenario.

2. Reserves and surplus of a company mainly include the amount of profit that is left over after paying interest on debt to creditors and dividend payout, if any, to equity holders. The amount is accumulated over the years. A ratio of market capitalisation and reserves and surplus reflects the number of times a company’s stock is valued over and above the accumulated profit.

3. When investing in a stock, a lower value of the ratio when compared with peers is desirable. It reflects that the market has not yet fully factored in the reserves and surplus level of the company. This offers support during times of poor earnings expectations.

The companies are filtered based on following factors -
a. Companies that earned atleast Rs 400 crore in turnovers during financial year 2011, this has helped to eliminate companies which may report a higher volatility in their financial performance due to the smaller size of cooperation.
b. Reserves and surplus for these companies have more than doubled since year 2006.
c. Companies traded with lower valuations on the basis of market capital relative to reserves and surplus.
d. Companies that had grown their sales and net profit at a compounded annual growth rate of atleast 35% over the last 5 years.
e. Finally the companies which have grown consistently in double digits and currently trade at historically lower valuations based on market capital reserves ratio.

Please Note - The following companies are expected to return to their growth path in the long term even though they may report a slowdown in the short term due to economic uncertainties.
Investors can track the quarterly performance of these companies to assess the impact of macro parameters on their financials.

1.Tata Motors
A leading player in the global and domestic auto industry reported a lower-than-estimated growth in the June 2011 quarter due to rising costs at its key European operations. In addition, the adverse impact of currency movement broadly offset the improvement in average realisation at JLR (Jaguar and Land Rover) subsidiary. In the coming quarters, the current crisis in Euro zone may impact sales growth of JLR. On a positive note, Tata Motors will shortly launch the Evoque sports utility vehicle (SUV) in Europe. Consumer interest for this model is understood to be strong with around 18,000 advance bookings. Deliveries are expected to begin from September. This should help the company to deal better with a rather difficult operating environment in Europe. Apart from that, Tata Motors will continue to expand in higher growth markets such as China, which should support its future performance.

2.Shriram Transport
Shriram Transport is one of the largest asset financing NBFCs with a strong competitive positioning in the used commercial vehicle financing space. The company has proved its ability to manage risks through various business cycles and has a solid balance sheet with 25% capital adequacy ratio as of June quarter. Shriram has managed a 22% loan book growth without giving up its asset quality. However, the company has a few nearterm concerns like slowing growth in the commercial vehicles (CV) market and rising funding cost. This may translate into pressure on net interest margin. Also if, RBI moves small truck operators out of the priority sector lending, the volume of securitisation will fall, impacting the company’s growth. Due to these factors, Shriram Transport is trading at one-year low price to earnings ratio, although it is still expensive compared to its peers. However, a strong business model, asset quality and the ability to pass on costs makes it a good buy for long-term investors.

3.Havells India
Havells India is India’s leading consumer electrical goods company with consolidated sales of 5,612 crore. But the company’s earnings growth had suffered in the past due to Sylvania, its loss-making, wholly-owned subsidiary.
Sylvania which contributes nearly half of Havell’s consolidated revenues makes lightings and fixtures and has established brands in European, Latin American and Asian markets. Sylvania’s performance has improved over the last two-three quarters.
In the coming years, Havell’s earnings growth will be driven by the improving profitability of Sylvania. At the current market price of 345, the company is trading at a price to earnings multiple of 14 which looks attractive. The only concern is its high debt to equity ratio of around 3.

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