Very good results. The company has already crossed last year’s profit and revenue (by more than 50%) and EPS is also almost double. It appears that the big order that the company had won around 2 years back is finally getting executed. “If” this is the case then the visibility for this growth is fairly big.
There are very few sectors which are relatively unaffected buy any global headwind like intercountry tensions, wars (be it physical or economic) and are mostly affected by domestic factors only. Cement sector is one such sector which is have heavily influenced by the the domestic Government and private sector actions and is therefore unaffected by any external factors. The present pandemic has caused a global economic damage of epic proportions and has seriously increased the chances of a global recession and therefore during these times it is important to have investments in sectors which would thrive despite this crisis. History has told us whenever there is a major recession the governments have had to to spend its way out of it. The favourite sector of most of the governments to spend on is infrastructure – as it is a big sector and any investment in this sector percolates to various other sectors giving a positive flip overall and especially to jobs. The biggest beneficiaries of any infrastructure push is cement as it is one of the common themes in almost all the industry be it real estate, construction, roads, ports etc. One other advantage of cement sector is that it grows if the economy is doing well, thanks to private sector push and it grows if the economy is not doing well, thanks to public sector and government funded projects. And this is the reason why the cement industry in India has thrived over the last few decades.
The company: Shree Digvijay cement is one of the oldest cement companies in India and it’s more than 75 years old and in fact has a unique distinction of being inaugurated by one of the tallest leaders of of India that is Sardar Vallabhbhai Patel. Over the past many years the company has been struggling to make any money due to various reasons and finally last year, it was taken over bye one of the India’s most well known private private equity call true north. And since they bought they have engineered a major operational turnaround in the company reflecting in the Stellar results. True north is known for its value creation in various companies like syngene Biocon TTK Healthcare Mahindra holidays Cloudnine hospitals etc. In case of Shri Digvijaya cement the company has partnered with the cement industry veteran who is truly experienced in in the sector. Shree Digvijay cement has 13 million tons of of limestone reserves and operates a cement plant of 1.2 million tons capacity near Jamnagar City on the Saurashtra coast of Gujarat. Company sells its cement under the brand of “Kamal cement.”
Valuations: it is a debt free company and has a cash balance of more than 75 crore. It is trading at a multiple of around 14 and recently gave its Maiden dividend. In the cement sector this is one of the most reasonably priced stock and with perhaps one of the best balance sheet. Promoter holding is at healthy 56%.
Technicals: Technically the stock is very strong and had broken out after multi decade consolidation. After breakout the stock came back to test it Breakout range and started it apart journey again. This is one of the most reliable technical setup.
They way the new promoters have engineered the turnaround it proves that the company is capable of making very good profits if the control is in right hands. Even the cash generation was stellar, again proving this thesis. Hopefully, the turnaround will gather steam moving forward.
Background: The textile industry is one of the largest employers in the private sector and therefore it is vital for any job growth in the economy. In the aftermath of covid pandemic there has been serious job losses in the country and it is imperative that the government will take big steps to fuel job growth and will therefore incentivize sectors which have huge job potential. We have already seen numerous sector being incentivized and given the importance of textile sector sooner than later this sector will also be incentivized. Further and probably the biggest tailwind the sector has that it also benefits from the anti China sentiment. This sector is expected to be strongly affected by the the supply chain shift from China to countries like India and Bangladesh and this shift will be particularly beneficial for Apparel producers.
The company: SPL industries is a garment exporter. SPL had been a struggling company for a very long time and eventually in 2013 there was a change in management and the current management took over the company. Ever since, the new management has turned around the company on back off strategy change and cost control measures. It is reflecting in the key efficiency metrics too. Operating margin in the last six years have significantly improved from negative double digits positive mid-teens and is among highest in the industry. Sales have grown more than four times in the period and net profit has increased multifold. The quality of balance sheet has significantly improved with the company becoming almost debt free. One of the additional significant changes that has happened in last couple of years in the company is that it has minimised its manufacturing and is only exporting the garments that are procured from its group entity SPL prints. Why this arrangement – Well, there is some history to this. SPL Industries had not done meaningful up-gradation of its machines and given the health of balance sheet it was decided by the management to get the manufacturing done by shivalik prints ltd, which already had state of the art machines and was in close proximity to SPL Industries. It is also important to note that since this has happened the promoters have increase their stake in the listed company by an additional approx 2% clearly signifying their interest in value creations in the listed company. This has also increased the return on equity and return on capital employed. Further, the operating margins have also improved after this restructuring – this appears to be an interesting move. Having said that one should always keep this on the back of their mind. SPL exports its products to various international retail chains and super stores, predominantly in USA, Europe, Canada and Japan.
Valuations: SPL industries is available at a throwaway PE of of less than 3. The company has almost negligible debt and cash of more than 46 crore which is more than 55% of the current market cap. The company has extremely robust cash flows as well. Promoter holding is at big 68.9%. After all these years the company has come to a situation that they have started paying income tax and this should augur well for stock Re rating. What next – Dividends? Lets see.
Technical: the price seems you have made a double bottom on monthly charts and if one analyses the price action for the last few weeks it appears it is been quietly accumulated at these prices and for me personally the stock looks attractive and valuations are factoring in a lot of negativity. Even in the worst quarter they have given a good EPS and we’re assuming as the world normalizes, hereafter the earnings are only going to pick up.