Background: What do you do with a company that is debt free, dividend paying, has great cash flows, commands an 5 yr Average RoCE of around 33% and 5 yr average RoE of 25% and RoIC of 38% and is available at 6.5 PE, has grown (since Mar 09) at a CAGR of 35% topline and 75% bottomline and is the only listed play in its sector.
The Company: DHP India Limited is a Manufacturer of LPG Regulator (Liquified Petroleum Gas Regulator) and its accessories. DHP started as trading company but evolved into a manufacturing company which substantially improved their bottomline. The company is export oriented company and manufactures rubber hoses for gas connections and Gas cylinder regulators for both industrial and domestic use. The company has a very simple business and need not much explanation. They export their products to various countries at the moment but more importantly it is going to enter newer countries and once they do (after finishing the formalities of getting licenses), the earning would get a major fillip. The company as of now is export oriented, but the domestic opportunity is still not explored by the company. One of the major turn-offs for this company for not pursuing domestic market had been the red-tape, which they hope would be cut with the change in regime in the center and this should open a new and massive opportunity for the company. The company recently underwent expansion and the entire expansion was funded by internal accruals and is therefore, running at around 50% capacities which give it ample opportunity to cater to potential surge in orders. Although the industry is fragmented with lots of small players in the market but the company stands out on back of its superior processes and products and excellent operational excellence.
Why to Buy:
- Company is planning to enter newer geographies, which would give a major fillip to the earnings.
- Domestic opportunity still un-explored and in time company would start contesting tenders which again would open a massive opportunity for the company.
- One of the most profitable companies in the entire sector.
- Extremely honest management.
- More than 74% promoter holding without any pledge.
- Revenues grown at 31% CAGR and profits at 58% CAGR in last 5 yrs.
- Extremely strong return ratios, debt-free, strong cash flows, and lots of spare capacity to serve potential surge in orders.
Valuations: This debt free, dividend paying, high cash flow company is available at just 6.6 times Trailing PE. The company has shown marginal dip of around 9% in first nine moth YoY in sales and around 10% in profits YoY which was on back of some extraordinary growth in Dec 13 (and mar 14) numbers. So opaquely, the numbers might be slightly below par, but given the fact that the revenues have grown from 12.53cr to 49 cr and bottomline has increased from 0.65 cr to 7.4 cr the trend is strongly up and the company is expected to continue to grow at around 30% CAGR for the next 3 years. This could go up if the company finally decides to take a plunge in the domestic market too. YoY the results may look subdued for next couple of quarters, but that should be taken care of subsequently with newer orders kicking in.
Technicals: The stock corrected on back of subdued results but bounced off from 200 DMA and therefore, technically very positive sign.
The Company is for genuine long term investors and at the current 6.5 trailing PE and 7.7 FY 15 PE, it’s a very attractive level to enter with a view of few years. The stock will reward patience very aptly. The company has one of the best margins in the industry, is being led by a very honest and down to earth management and is the only listed (as per the management) company in the space. The company has shown strong growth in last several years and is expected to continue to grow at a brisk pace in the coming years. The company’s small equity and high profitability gives it a very big EPS growth for relatively small surge in profits. Dont just look at past results but look at the earnings potential in the next few years.
Disclaimer: No holding in the stock, but it is safe to assume that I may or may not invest in future. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.
God Bless !!