Some show stoppers of Q3
Two big variables on the investing landscape engross analysts – whether the economy (hence, companies) will grow fast enough and if the markets will faithfully reflect that.
These are some third quarter results that caught my attention:
Bhansali Engineering Polymers (BEPL): Around January 2017, BEPL reported an Ebitda (earnings before interest, taxes, depreciation and amortisation) of ~95.5 million and I would have been excused for dismissing it as overpriced. But, consider what transpired thereafter. An Ebitda in excess of ~280 million in Q4 FY17, profit increase in every subsequent quarter and finally an Ebitda of nearly ~490 million in Q3 of FY18. Sadly, one can’t buy a stock whose annualised Ebitda (another story but permit me to be an optimist) has been discounted 15 times, though I will concede that the interest cover of 22 times indicates the company is currently swimming in cash.
Tata Sponge Iron: The type of performance that makes me bullish on India. Sales increased across each of the past five quarters but one; total income strengthened from ~1.43 billion in Q3 of FY17 to ~2.14 billion in Q3 of FY18. What I absolutely love is the way it has translated revenue increase into profit growth. Ebit (earnings before interest and taxes) strengthened from ~160 million to to ~570 million across the terminal quarters (58 per cent of revenue growth); interest was a mere ~23.3 million in the past quarter or an interest cover of around 30 times. Outstanding for a commodity steel sector play at the cusp of sectoral turnaround. Market cap: ~18 billion (would have preferred this commodity play cheaper). Sterlite Technologies: One of India’s largest manufacturer of optic fibre cables and structured data cables makes for an attractive proxy of a digitising India. Here, too, I find evidence of sustained growth across the past five quarters — Ebit of ~1.04 billion in Q3 of FY17, increased uninterrupted to ~1.64 billion in Q3 of FY18; interest declined from ~300 million to ~260 million across the period. The problem is its valuation of ~150 billion (which means the annualised Ebitda is valued 18 times and the market has already discounted all prospective growth). Sadly.
Prakash Industries: This is not the first time I am writing about this company in recent times. The reasons lie in the company’s growing numbers – increased Ebit across each of the past five quarters, starting from ~370 million in Q3 of FY17 to ~1.20 billion in Q3 of FY18. If one is worried about the commodity play part (the company mines ore, generates own power and manufactures steel), remember the company comes with an interest cover of eight times. A market cap of ~37 billion for a company with annualised Ebitda of ~6 billion does not look too bad at a time when the sector is poised for an uptrend. This is a stock I would keenly watch across the next few quarters.
So, it is an interesting market. A few things would be really cheap and it would be a time to tread with caution, unless one believes in buying high and selling higher. I don’t.