In the second part of the A-List series ( first part here ), CNBC-TV18’s research team has continued to look for companies that pass strict filters of growth, EBITDA, cash flow, balance sheet etc, to bring to investors’ attention stocks that merit further investment scrutiny.
Note that the companies discussed herein are not stock recommendations.
The companies that the team is focusing on are TV Today and Bata .
TV Today Network is engaged in news broadcasting operations, and is part of India Today Group and operates TV channels, newspapers and radio FM channels.
The marketcap of this company is Rs 1,200 crore, 52 week high was Rs 260; the stock has corrected nearly 20-25 percent from those levels.
The most important thing about this company is that it came out with an initial public offering (IPO) in 2003 and since then there has been no equity dilution done by the company.
It is a debt free company, there is no equity dilution done by this company in the last 13 years and yet the company has been able to create brands and also able to generate numbers in the last few years.
If you look at the revenue growth for the company, the three-year compound annual growth rate (CAGR) for the company between FY13 and 15 was 16 percent. The five year CAGR for this company was 18 percent.
Three year CAGR profit growth was 88 percent from a very low base. It was near Rs 11-12 crore of profit and it did Rs 80-82 crore in the last FY15. The five year CAGR is also 87 percent for this company.
The company’s long-term borrowing is zero, short-term debt is only Rs 7 crore. It is a free cash flowing generating company. It is completely domestic company, so there is no global or China or any forex impact.
Looking at the consolidated asset picture, the company has cash on books of nearly Rs 95 crore and non-current investment of Rs 45 crore. There were total receivable of Rs 140 crore against which there is a trade payable of Rs 67 crore.
The company is trading on a multiple of 12-13 times FY15.
Even if it is assumed that the company will not grow at 80-88 percent as what it has seen in the last three-five years — even if you give it 20 percent growth going ahead, on this base it will make around Rs 100 crore of profit going ahead in one or two years.
On that basis the company is trading at around 12-13 multiple for FY16.
The key positives for this company are: attractive valuation, no debt, cash on books, future growth drivers, visibility (of earnings) factor — digitisation. The Digitisation will increase average revenue per user (ARPU), will reduce carriage fees, and you will see operating leverage coming in this company because the fixed cost for this company is already put.
So if the advertisement rates increase, you will see higher operating leverage. It already operates on a margin of nearly 16-18 percent; the return on capital employed (RoCe) for this company is nearly 20 percent for this company. So, all these benefits will come into play.
Bata India, a multinational company (MNC) wutg parent holding 53 percent is trading lower than the Indian competitor Relaxo, in terms of multiples trading. We will look at both the numbers but that was the first trigger to watch out for that stock.
The stock is down more than 20 percent, from its 52 week high in the last one week it is down 7 percent, in one month it is down more than 10 percent. So the stock has been under pressure in the last one month the stock has corrected sharply.
Valuation metrics: FY16 earnings per share (EPS) is seen at Rs 28, FY17 EPS is seen at Rs 36. On that EPS the stock is trading at 30 times FY16 and close to 28 times FY17.
If you look at Relaxo, which seems to be the next competitor for Bata in India — Relaxo is trading at 52 times FY16 and almost 40 times FY17. So that is the kind of valuation gap you are seeing between Bata India and Relaxo at this point in time.
Bata has got the highest margins at 14.7 percent, Relaxo is at 13.5 percent and we have also looked at Liberty Shoes, which has a margin of around 8.3 percent.
The company’s three year compounded annual growth rate (CAGR) is at 14 percent, five year CAGR is at 29 percent. Three year profit growth is at almost 11 percent CAGR, 5 year CAGR is almost at 38 percent.
It is a zero debt company, cash flow generation, parent holding 53 percent. So these are the key positive metrics that we have seen given the fact that the stock has corrected almost 25 percent from its peak.
In terms of challenges, they have been implementing the SAP in their entire value chain so that has put a bit of a pressure on the company’s margins. Also they have been giving a lot of discounts in the last few quarters, so that has added to the margin pressure and the fact that they are looking at adding 100 more stores in the feature so that in the near-term will add to the margin pressure.
The only thing why we looked at Bata and Relaxo is if you look at sales picture, Bata sales is Rs 2,200 crore, Relaxo is at Rs 1,400 crore. Profit for Bata is at Rs 150 crore, profit for Relaxo is at Rs 100 crore.
Bata has 1,200 stores versus Relaxo’s 200. So in terms of reach, in terms of size, Bata looks much bigger in all format but in terms of valuation, it is now trending at a deep discount to its next competitor Relaxo.
These are the valuation metrics but the fact is that it is an MNC, good reach across India, margins are of course under pressure in the near-term but that is something which is likely to change in the near future.