Associated Stone Industries (Kotah) Ltd – Mine It For Your Portfolio

Background: Kota Stone is a fine-grained variety of limestone, quarried at Kota district of Rajashthan. The industry is led by the largest and only listed company in the space “Assosicated Stone Industries”. The stone is an excellent building stone. It is mainly used for exteriors, pathways, corridors, driveways, balconies, commercial buildings etc. It is also suitable for use in chemical industries as flooring, wall fixing and lining.

The Company: Associated Stone Industries is the world’s largest stone mining company and the only listed one in India. The end user of the industry is the Real estate, construction and Infrastructure. For last few years the stone mining industry, as with other mining industry, was marred with Environment clearances and slowdown in construction and infrastructure. These business and regulatory challenges mounted problems for the players in the industry but as they say, what not kills you – makes you stronger. Yes, the industry crippled but ASIL due to its size and scale climbed the wall of worries and took this opportunity to cut its flab and diversify in other markets. What this slowdown and uncertainty also did was that it wiped out a lot of small and unorganized players and thus gave a strong fillip to the mining leader – Associated Stone Industries (Just like the sector tailwinds a few years back helped the leader like SKS Microfinance). This can be seen clearly in the improving OPM, though last year the OPM were slightly subdued because of heavy investments done in the UAE subsidiary (which started its commercial operations last week). The company though has a large area under which it does its mining it is now looking to acquire more land for mining. The industry is marked by huge entry barriers where acquiring mining leases are very difficult and also have an additional challenge of getting Environment clearances. The company’s scale and the distinction of being the only company in the organized sector of Kotah Stone Mining gives it a strong edge for big institutional orders. Over the last couple of years, the company also undertook an efficiency improvement exercise where it improved its waste generation and tuned its power requirements – resulting in better operating efficiency. Last week the Commercial Production commenced at the Company’s Subsidiary viz. Al Rawasi Rock & Aggregate LLC, having Limestone Quarry and Crusher Unit at Fujairah, UAE. This subsidiary was in investment mode till last financial year and thus was a drag on the consolidated balance sheet, but now, will “substantially” add to the topline and bottom-line of the company starting this FY. This year the company has given its highest ever Turnover, Profits and EPS. This is set to double in the coming financial year. On back of excellent cash flow, the company has been giving increasing dividends every year for last few years. With the current revival in the infra and construction sector and start of its subsidiary’s commercial production the stature of the company would only improve with time. The promoter holding stands at 70.4%.

Valuations: The company (available at a market cap of just 95cr) is trading at just 2.8 times its forward PE and  5.5 times its standalone trailing PE and 7 times its consolidated trailing PE, but what is very important to note, that a few days back their UAE subsidiary started its commercial production production and this would “substantially” add to both topline and bottomline of the company and it is expected to clock an EPS of around 25-32 in FY16 depending on the performance of its subsidiary. The last two standalone quarter’s EPS has been 6.95rs and 8.24 rs.The company is a regular dividend paying company and has been paying consistently increasing dividends for past so many years. Again, its very important to note that the company has “very strong cash flows” and has  cash on books of around 17cr with an interest coverage ratio of around 4.5 backed by a tiny equity of just 6.63cr and a very high promoter holding of 70.4%.

Technicals: The stock is looking very promising on charts. Its currently trading at multi-year highs and recently broke out from short term consolidation and is looking all set to challenge its all-time highs of 128 in weeks to come and given enough time and space the stock should not only cross 128 but go way farther. Even in these falling markets the stock is near kissing distance of yearly highs (which again is a multi-year high) and is looking bullish from both short to long term perspective.

Here we have the biggest mining company of its sector (and the only listed one) with extremely high promoter holding (and a small equity base), that is set to increase its turnover and bottomline significantly in the coming year(s), available at less than forward PE of 3, giving increasing dividends every year, with excellent cash flows and a cash balance of around 17cr with a market cap of just 95cr. I believe for a smart and patient investor, the stock could reward significantly. The stock is set of a PE re-rating. One could also consider switching from Aro Granite to Associated Stone Industries as I believe Associated Stone has better growth prospects and technical than Aro at this point in time.

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Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.