Sunday, May 27, 2007

Gandhi Special Tubes

Market Value: 7.34 million shares outstanding*130= 954 million
Industry: Steel – Tubes/ Pipes
Performance: Underperformed sensex by 25% for last 5 yrs
Dividend yield: 4/129 = 3% (moderate)
Institutional Ownership: Virtually No MF Holding
p/e ratio: 129/21=6.1 (cheap)
Market/Book value: 129/66=1.95 (moderate)
The stock is cheap, obscure and cheap
Enterprise Value=954 million+11.35 million=965 million


Net Asset Value = 490.87 million
Net asset value per share = 66.7

Ratio Analysis

As on
PBIT/Cap. Employed (%)
PAT/Networth (%)

WACC= 10% the company is generating value by showing roic of about 41 %

Total Cash= 28mn+90mn=118mn
Total liabilities= 92 mn
Net current assets= 26mn
Net current assets per share=3.53

EPS+ Net Current assets per share=21.9+3.53=25.43

Real p/e ratio = 129/25.43= 5.07 (earnings yield = 20% pretty good)

4 yr avg growth in PAT= 48.5%
4 yr avg growth in Invested Capital= 20.2%

Showing good growth rate without much addition in invested capital
Return on tangible assets=76%

with real good growth rates and high roic the company surely looks very attractive. the stock is pretty cheap compared to the assets. It shows good returns on capital without much addition to the total invested capital

Operating Margins

2006 2005 2004 2003 2002
OPBDIT/Sales 32% 33% 30% 31% 29%

Very Stable and High Margins

Earnings Power
The value of a debt free company has to be substantially more than the amount of debt it can comfortably service. It's a principle which was first laid out by Ben Graham in Security Analysis.

OPBDIT=210 million


5-yr average fixed assets/sales= 274million/630million=0.43

5-yr average growth in sales= 100 million

5-yr average growth capex= 100 million*0.43= 43 million

5-yr average actual capex= 55 million

5-yr average maintainance capex= 55-43= 12 million

5-yr average depreciation = 34 million

excess depreciation= 22 million

add excess depreciation back to OPBDIT we get OPBDIT= 232 million
using a 5-yr average tax rate of about 28 %
we get PAT=167 million

Weighted Average Cost of Capital = 10%

Amount of debt the company can finance without gaining any growth in earnings in the future = 167 million/0.10= 1.67 billion rupess

Debt-capacity =1.67 billion
Net asset value= 490 million

The earnings power of the company is far greater than the asset value of the company but without any barriers to entry or sources of competitive advantages the company might lose its current earnings power. dont know whether any competitive advantages such as economies of scale do exist. The earnings power might equal the asset value in the next five to eight yrs if doesnt have any competitive advantages like economies of scale which is very less likely to exist in this siutuation so would buy the stock for less than the earnings power of the company.The company shows high return on Invested capital so it might suggest some franchise value. without giving much consideration to the growth in the the earnings of the firm. According to my calcualtion the company is atleast worth 1.67 billion rupees which is 227 rs. Presently the stock is highly mispriced relative to its intrinsic value and provides margin of safety of about 43% relative to the earnings power of the company. without using any high earnings projection rate i calculated the intrinsic value of the company for the next 5 yrs to be around 227 rs.
Using a discounted cash flow the intrinsic value of the stock might be much higher but i would be comfortable holding the stock for the next five yrs without considering any growth factor . but by looking at its previous five yr financial records it seems that the company might continue to show great growth rates without much addition in the invested capital