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Commentary

Mudra Lifestyle – Stock Idea

After a long time I’ve found something worth buying. A company with a 3.9 P/E is very interesting, though there are risks. But note that I am the kind of guy who is willing to lose money so if you want a “safe” investment please consider a fixed deposit instead.

So Mudra Lifestyle is a garment manufacturer that has been beaten down to death, or nearly so. At the current price of Rs. 36.1, the company quotes at a P/E of around 4. But why is this company interesting?

Solid growth: EPS on 06-07 was about 6.3. The EPS in the first nine months of 07-08 is already Rs. 6.5, and probably will reach Rs. 9 for the year. They announced in December of a 35 crore order set to be completed in four months, that might be accounted for in the current quarter or the next. On an equity of 3.6 cr. shares, and average margins of 10-12%, this set of orders itself should yield a Rs. 1 EPS.

Promoter Interest: The promoters have just been granted 30 lakh warrants at Rs. 120 per share. Remember that the IPO was at Rs. 80 and the price has been to about 110 since then, but the promoters still decided to take on warrants at a high price. The warrants themselves will yield Rs. 36 cr. when subscribed to. Additionally, the company secretary and CFO have bought shares in the market, and have not sold.

Lower than book value: According to some sites, the book value of Mudra is Rs. 80 per share. While I don’t know if this plays a part in this kind of business (of custom orders etc.) it is a good metric to know that if the business goes bankrupt today you can get more than the share price by selling assets. At least in theory! In practise this is not a fantastic metric, but I have seen how it has really boomed in the case of Sintex, another textile play. Sintex, in 2003 was quoting at Rs. 75 (Rs. 15 after adjusting for splits) which was below its book value. After being beaten up a lot, it is at Rs. 300 today, a 2000% return in four years! (and it was Rs. 500 recently)

Cashola: Yes, this company seems to have oodles of cash. They have used just 9 cr. of the 86 cr. IPO proceeds, all towards expenses. (You see how Investment bankers get rich? More than 10% of the issue!) They currently have 83 cr.in the bank according to their Jan announcement. That itself is a good Rs. 23 per share.

So what I would pay for this business is the price of Rs. 36, of which Rs. 23 is cash. They do have Rs. 71 cr. of loans, but most of that has assets behind it. At a P/E of 4 I am not quite afraid of P/E contraction, and the company is growing at around 33% on EPS.

There must be something wrong though. What?

The textile industry has been hosed nearly all of last year, with the declining dollar. Mudra isn’t so reliant on exports so it is less affected, and it may be the white knight of the sector. Still, the sector has been impacted much, and perhaps there will be news we haven’t yet heard about. At a P/E of 4, I would need Mudra’s growth to reverse massively to make an impact – I don’t quite see that as a huge risk right now.

I do not know if there are other risks like currency risk, derivative risk etc. But I can’t predict all of that right now, we have to work with what is known.

Overall world slowdown is a concern, but the cash base allows it to make acquisitions and grow in turbulent times. Having a cushion is important.

Finally the concern is that the market will never recognise this as a good buy. There isn’t much institutional interest, with no mutual funds holding it and some FIIs only (about 10% being held by institutions). But that just means it’s undiscovered, and I am happy to take the risk earlier.

This is a downright buy for me. I am holding for a 100% return within three years. Why three? Because the current market conditions don’t allow a one year story. If I do my 100% earlier I might exit. My stop loss is a further 25% down from here, at Rs. 27.

Disclosure: I own this stock, it is about 10% of my portfolio now. (Why would I write all this about a stock and not buy it?)

  • Anonymous says:

    >Nice analysis Deepak. But am I beginning to smell the “investor” in you, as opposed to a Trader 🙂
    10% of your portfolio, holding for 100% return in 3 years..hmmm
    Anyway good luck, I’ll probably buy some too ..Thanks
    Hari –

  • Rajesh says:

    >Hey Deepak!

    Good analysis. How do you read Sasken at this point in time ?

    Rajesh

  • Roshan says:

    >Deepak, let me give you my contrarian view – You are investing in a fashion brand. Here brand is everything. I would make a lot of money investing in people who have a proven track record of building brands. Ones that don’t are just going to destroy capital. You should be aware that money in the hands of bad marketers will be spent and the brand thus created will not be worth the capital spent. Frankly, I’m surprised that a company like this was able to go public with not a single brand that I can recognize on their home page. What should a company that contract manufactures for others be valued at? One that does not control it’s own destiny and may not have great creative skills. I feel this business with scale will bring increasing risk and while you may not risk losing money by investing looking for value – are you not taking a huge amount of risk to buy a part of a fixed deposit that you don’t control ? I think we need to look at Warren buffett’s words- where is the moat in this business?

    cheers,

    Roshan

  • Anonymous says:

    >What’s your comment on House Of Pearl Fashions? It did it’s IPO @550/- odd and is now at 150/- the last I checked. Similar business.

  • Deepak Shenoy says:

    >Rajesh, no views on Sasken. Am holding off on the tech pack in general – US situation has not bottomed out yet.

    Roshan: The Q really is – is this is a brand company or a textile manufacturer? Other brands buy their textiles from Mudra, and Mudra’s own brand is a very small part of their business. One can say don’t invest in contract manufacturers, but that is where the money is (like Infosys, or Wipro or such). Textiles are economies of scale, and these guys seem to have built a good business in bad times!

    There is no moat to any business. Buffett invests in interior designers. What is the moat in that? Don’t take Buffett at face value – he invests in boring profitable businesses at low valuations, period, and that is very much what Mudra is right now. A creative business is the exact opposite of a buffett pick.

    Anon: I didn’t like HOP at it’s IPO, but thinks might have changed since. Will check.

  • Roshan says:

    >deepak, I disagree. I think there exist significant moats in today’s business world. Coke, P&G, Amex, Kraft are huge brand owners and are key stocks in buffett’s portfolio. Their brand is their moat. I don’t think he buys at low valuations -as a corollary would be that he would sell at high valuations. The fact that he continues to be invested in these brands is that he feels that the effort required to exit these stocks and to identify suitable other investment opportunities is just not justified. I think in today’s market there are a huge number of companies that are undervalued. It’s wise to try and seek alpha( I know it sounds cliched) while keeping in mind that the markets are fairly attractive and there would be many companies who would be trading between 2-7P/E or below book value. 25% returns on an annual basis (100% on a 3 year basis) is fair when compared to 10% on a fixed deposit. However to enter a stock of this size with that target is probably not setting a bar high enough for the winners in your portfolio. These are my initial reactions – I find your writing interesting so would be interested to hear your views on the same.

  • Deepak Shenoy says:

    >Roshan: To be honest, only brands like Coke or Gilette have a moat that is significant. Amex is getting easier to beat by the day, and most others in his portfolio are private companies that have very shallow moats.

    Buffett buys cheap…he never sells! He has always bought cheap, he never ever ever buys unless prices are low (when I say low I mean as either P/E or intrinsic value comparison)

    Mudra’s a low cap stock – only a 140 cr. market cap – with excellent growth even in negative times. There aren’t too many companies where the downside is LIMITED which the upside is great.

    I think there are always good stocks in the market, and Mudra is just one of them. But it’s good enough for me to put 10% of my money in there, and time will tell if I’m right or not. (I have been wrong before!)

    Right now all the big hits in my portfolio would be shorts, not long – because shorts have a better return than the longs on the same time frame. That might change as well, with time…

  • Roshan says:

    >absolutely Deepak. A very respected investor I once met highlighted to me the benefits of shorting – according to him 1 in 100 are good companies – 50+ are bad apples s0 its much more easier to identify a candidate to short. That was of course before the 1999-today bull run.

  • Mumbai Journo says:

    >What do you think about these companies growing to 8-10 baggers in the next five years?

    1. Kamat Hotels
    2. Venus Remedies
    3. Yes Bank
    4. Axis Bank
    5. Future Capital
    6. IDFC
    7. Blue Star
    8. Dish TV (I know it is high risk, high return play)
    9. Future Capital

  • Deepak Shenoy says:

    >Kamat: yes, I like. Banks: nope, not entirely my cup of tea these banks (but Canara, yes, Must pick it up).

    Future cap: would wait for US unwinding to complete, same with IDFC.

    Blue Star and Dish I haven’t yet analysed…

  • Anonymous says:

    >Another stock whose price is below book value – Pricol. What is your view on that?

    Thx,
    Sankar

  • Anonymous says:

    >Deepak, yes it is good to see the investor in you make an appearance after a long break 🙂 More than the idea itself i really enjoy the analysis. Have you done a similar exercise for canara and kamat? where can i find them?

    I have some family in the textile business so will ask around for mudra’s credentials.

  • DK says:

    >I remember buying a stock called Teledata on a similar logic. Enticing P/E. Decent promoter holding et. al.
    The company has been growing impressively as well.

    And it fell from 60 my purchase price to around 15 now. And I could never figure out why.

    If the market does not show an interest, the stock will never move much.

  • venu says:

    >Hi Deepak, Thanks for the analysis. It is very informative. Can you explain me how did you find this pick from thousands of stocks in the market. I’m more interested in knowing the process. Are tools of moneyoga.com used in this process.

    TIA,
    Venu.

  • Anonymous says:

    >Deepak..nice analysis. I remember your succesful calls like BHEL and after a long, long time, you have given a stock idea. What is important is that – low p/e, growth, cash – all these are there for dime a dozen shares in BSE. for eg,.the above given Teledata, I had to exit at 17, after buying at 60. The problem seems to be – since the list of low p/e, decent growth stocks are high, we have to pick winners – given our limited capital. I don’t have Bufffet style capital, obviosuly and I can not spread. Given that and also the fact that mid caps and small caps take 3 times the time to bounce, as opposed to large – I feel that Mudra 3 year time frame is realistic. But believe me, there are dozens out there of this nature and I will be interested in far more exciting ones than Mudra, where the visibility is till low.

  • paddy says:

    >Hi Deepak.,
    Thanks for the good tip on Mudra.
    What is your opinon on Asahi Songwon colors Ltd.? Will you invest in this? I want to know your views.
    thanks
    Venu

  • Anonymous says:

    >Please refer a story related to Mudra in today’s BS: http://business-standard.com/common/news_article.php?leftnm=1&autono=318581

    Such “anonymous” plugs are what scares me and are good indicators of lack of governance. Why couldn’t the company make an official release on the expansion (or whatever it is)? Or does this company also have “executives” assigned to keep track of stock price and if required, manage stories?

  • Deepak Shenoy says:

    >anon: If you’d decry this practise, the biggest practitioner was Infy! For years it has released slow and steady information to the markets, and even now, you get “unnamed” sources saying this deal has happened or that one will.

    The report is interesting in that there is no named source, but usually exchanges will request clarification and we should see a result.

    Also this is not huge news. It’s just capacity expansion, and should impact only in the long run (doubling capacity on both garments and processing). With that much cash sitting unused, I would expect them to expand – otherwise they might as well give it all back as dividend!

  • Akshay J says:

    >The stock looks very attractive. It is priced much lower than book values. There are some things, which I do not fully understand about this company.
    1. Tax: Why is the tax payout so low? It is less than
    2. Why is the tax deferred, when they have enough cash?
    I do not see this company exporting much (less than 10% of sales). How do they manage to getaway paying so less tax.
    3. Also, they have paid 0 excise duty.

    The stock certainly looks nickels priced as dimes, but I would want to understand this, before I trust my money to a management, which does not have a history.

  • Deepak Shenoy says:

    >Akshay: Where did you get the tax figures from? In the last three q’s they have about 24 cr. of profit and 4.8 cr. net paid as taxes. Assuming their net payout will be about 25% – around 8 cr. for the whole year – they have paid 60%, which is pretty much as required by the tax dept (advance tax as of december)

    In the last financial year (FY07) they have deferred about 1.6 cr. of tax. In their offer document they say: “Deferred tax is recognized subject to the consideration of prudence, on timing differences being the difference between taxable income and Accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Such deferred tax is quantified using the tax rates and laws enacted / substantively enacted as on the Balance Sheet date. Deferred tax Assets are recognized and carried forward to the extent that there is reasonable certainty that sufficient future taxable income
    will be available against which such deferred tax asset can be realized.”

    That means they are reasonably sure such taxes may be avoided by means taken up in subsequent periods. (Could be by setting up bases in tax free zones or by getting different depreciation treatment) Here is where I would personally like to give them the benefit of doubt and go with the management. Even then, the impact is less than 5% of profits (expected to be 32 cr. this year, the deferred tax is 1.6 cr.) Not much impact on EPS.

    Also do you have links on the zero excise duty? I see no such data. In their prospectus: “Revenue Recognition:
    Domestic sales and Processing Charges are accounted for on dispatch of goods to customers and Export Sales are accounted for on the basis of dates of Bill of Lading. Gross Sales are accounted for inclusive of Excise Duty but net of sales return.”

    I would be happy to look through a link providing your info – please do let me know.

  • Shankar Nath says:

    >Hi Deepak,

    Hmm … a small-cap company for investment :-).

    A couple of questions –
    1. Why would the company not retire it’s debt of 71 crores with the cash available? (maybe, they have bigger capex plans)
    2. I think the FCF of the firm is negative.

    Warm Regards
    Shankar

  • Deepak Shenoy says:

    >shankar: I think they intend to use the money to get more debt and then increase capacity.

    FCF – do you know how you could calculate that? I don’t know how it works in Mudra’s case, where tehy generate around 30 cr. in Net profit a year…

  • Shankar Nath says:

    >Hi Deepak,

    Free cash flow is what a company has left over, after paying for all salaries, bills, interest on debt, and taxes and after making capital expenditures to expand the business.

    Use the formula : FCF = Net Profit + Interest + Depreciation – Increase in W.C. – Capex

    It is a known fact that EV/FCF is a much better metric than PE ratio.

    Warm Regards
    Shankar

  • Ravi Purohit says:

    >Hi Deepak,

    U might want to check a company called SPL Industries. Similar to Mudra lifestyle….showed nice numbers around its IPO and a few quarters down the lane. however take a look at its recent performance. its quite horrid to say the least.

    In case of Mudra Lifestyle….there are a couple of points worth considering:

    1). Sharp increase in debtors (frm 19 to 38 crore)

    2). sharp increase in finished & semi-finished goods inventory (18 to 37 crore)

    These are numbers as of 31st Mar 07. I would rather wait for the ’08 numbers to come in and see the current asset numbers.

    Further, if they are into exports, it is important to find out where do they export and what do they export. because, apparel exports market is very fickle. realizations can drop substantially in no time (therefore leading to a significant drop in profits)…given that most Chinese companies are far more competitive than their Indian counterparts.

    thats my 2-bit on the company…

    cheers,
    ravi.

  • Deepak Shenoy says:

    >ravi: Thanks – I’ve not bothered too much about 07 debt and inventory since things sorta evened out after that. Mudra hasn’t done too much in terms of exports (around 10%) otherwise I would have been concerned too.

    It’s major customers are Madura Garments, Arvind Mills and Raymonds. It’s going for a 6x capacity expansion on garments – plus some dyeing expansion. Fabrics and garments are sold in domestic markets mostly or so it seems.

    I’m still long – the price is up nearly 20% from my buy price and I will stick with this unless I hear adverse news that should hit growth hard.

  • sushyant says:

    >Mudra Lifestyle definitely interesting…. what really makes me concerned is the 178 cr contingent liabilities on their balance sheet… got this info from moneycontrol, not sure how correct it is…. any thoughts?

  • Gana says:

    >Deepak,
    I was looking into this today and looks like it had gone down to 10 and then has come back to 27 now. Is it worth investing in it now ? Are you still in or out now ?

    Thanks,
    Gana

  • Deepak Shenoy says:

    >Gana, still in. Didn’t buy more yet as last quarter results weren’t quite fancy. Waiting for this quarter and the balance sheet.

  • Gana says:

    >Thanks Deepak. Is this a good time to enter into this stock or wait for the 2008-09 results ?

  • silom hotel says:

    Good issue i will return to your page again thank you.