Stock Story: Vikas WSP, India's “Guar gum rush” Hero

It is very difficult to find a value stock and once you get even close to the fundamentals of such a stock you are bound to obsess over its financial data.
Vikas WSP, a leading Indian guar gum exporter is a hot value stock under the present economic scenario backed by attractive financials.

Premise
India contributes to world’s 90% production of Guar. Guar gum’s thickening, emulsifying and binding properties find useful applications in food, paper and textile industries. In addition to that, the new found demand surge is due its usage in the oil fracturing industry. About 90% of the Guar gum export is used to
extract oil & shale gas of which US forms a major market.
USA Guar gum imports have grown at a CAGR (proxy to annual growth rate) of 32% over the last 3 years. The primary beneficiary of this “Guar gum rush” is India's foremost guar gum powder manufacturer Vikas WSP with no major competitors in the market.

Numbers
The best way to tackle any economic opinion is to validate with financial numbers. Here is the chart of value drivers for the company. I hope you understand all of them. EBITDA is operating profit which essentially negates all the financial dressing by the company and provides a better picture than net profit/income.

Also, you can find the corresponding table here to satiate your number hunger.
Same story with more characters err side-kicks!

The above data narrates the profitability story of the company and its growth rate. The present state of company is also at healthy levels with `418 million ($8 million) cash. Debt has also come under tolerable limits with almost 45% decrease compared to previous year. Chart for the same is below:

Oh…wait!
Despite all these positive points don’t overlook the gloomy parts of the story. Some analysts and traders believe that Guar gum exports may drop 20% in 2012. This could well be due to high inventory levels of Guar gum by importers abroad fearing irrational price surge and dampened prices of shale oil in the market. This has dampened the upbeat mood of Vikas WSP stock which has gone down 15% from its all time high in 15 days. Is it a market opportunity? I’m asking you!

However, if you look at the stock carefully, it has grown 3X its value a year ago compared to flat benchmark BSE index which dipped around 5% during the same period. (Courtesy : Google Finance)

My Strategy
Keep on accumulating Vikas WSP shares at 55-65 Rupees level and don’t sell any share before it reaches 100 Rupees. Afterwards, sell at subsequent 10% surge in prices and exit the stock completely at somewhere between 150 and 160 Rupees. My target price is 170 Rupees, albeit! (Comment with your mail id, to get my valuation model for coming at the target price.)

For more company info: http://www.vikaswspltd.in/

Yours
A.G.

Effectiveness of Arithmetic Mean: Seagate & Western Digital

On 13 Nov'11, I had posted some advice on how to take advantage of floods in Thailand. In hindsight, the financial advice seems quite average.

The advice:

"...Invest in the ratio 1:4 favoured towards Seagate’s shares till the flood water recedes. Then, after Western Digital accesses its damages rethink your portfolio. Most probably, the damage would be substantial so invest in the ratio 1:3 after Western Digital’s stock hits rock bottom. Finally, take out money from Seagate and invest in Seagate & Western digital in equal proportions when Seagate’s stock prices double or so from the current levels..."

Turns out:

If you had followed my advice your $100 would be worth $201 on 24 Aug'12, i.e., 101% ascent in your portfolio within a span of around 9 months! However, if you had just distributed your funds equally among both Western Digital & Seagate and slept with peace, you would have woken up to a portfolio double the initial size ($196 for $100 invested 9 months ago) of your fund.

This is the reason every financial analyst shouts about the powerful sword of arithmetic mean. It averages out every bull and bear run in its way. During the nine months under consideration, Seagate jumped 103% while Western Digital rose 72%.

The takeaway from this analysis is even if you weren't suave enough to undertake the portfolio juggling or didn't have analytical skills to predict an outperforming future of Seagate against Western Digital, a 50%-50% weighted portfolio would have enabled you to double your corpus in just 9 months.

Yours

A.G.

Courtesy: Google Finance

EARNINGS SURPRISES

ThomsonOne is probably the most used source by analysts for earnings surprises. Or Thomson Reuters I/B/E/S. Or Zacks (I've never used it myself, though, so I would like to know how good is it).

For the uninitiated, let's first throw light on what what are 'surprises'.

Basically, brokerages come out with estimates on Companies' quarterly / annual earnings - and when we average all these forecasts, we come to a figure that we call 'consensus'. Now, when Companies posts their earnings, their numbers are either in line with consensus, or miss consensus (lower than expectations) or beat consensus (above the predicted figures).

An interesting piece of information I stumbled upon at Musings on Markets was spectacular - that just prior to Companies making earnings announcements, price movements tend to gain momentum in the direction of what should be the most obvious post-result movement.

 

Source: http://aswathdamodaran.blogspot.in/2012/07/earnings-surprises-price-reaction-and.html

Insider trading is a fact of life. Charts and numbers shout out loud.

Cheers,

AJ

Facebook IPO - Morgan Stanley Risked Break Issue

May 17, 2012. $16bn raised in an historic IPO, second only to Visa's 2008 IPO of $17.86bn.

This is huge, knowing that we're talking about an 8 year old company deciding to go public after having done a great deal to avoid such an eventuality.

Priced at $38/share with a $104.2bn valuation, all we can say at the moment is that Facebook hasn't lived up to investors and profit-seekers' short term expectations. There was never a significant pop to this IPO. Since then Facebook has lost just over 24% of its market cap.

 
Source: Yahoo Finance

 
Source: Google Finance

Facebook's shares started trading privately in the SecondMarket in 2008 and has since then grown from $3.5 in April 2008 to $42.72 in April 2012, valuing it at ~ $106.8bn (Chart beneath), where ~75% of these buyers were professional money managers (See Chart).

  

 

Source: SecondMarket

The underwriters were obviously under pressure to price the IPO offering close to trading levels that were already in place. So it didn't come to me as a surprise when Morgan Stanley upped the offer price from the $28-$33 range to $38, although I do still think the valuation should have been between $28 and $33. 

Did Morgan Stanley play into a break-issue risk? The answer is YES, although it got Facebook a few more billions in dollars (which is excellent for future sales pitches for the involved underwriters) and the underwriters made more money - $0.418 per IPO stock offered, translating to 1.1%, or nearly $176mn. The lead left - Morgan Stanley, JP Morgan, Goldman Sachs and 30 other banks have pocketed a good deal.

Facebook had always tried its best to avoid going public. The reason why it had to do so now was because in December 2011, its shareholder count exceeded 500 - and according to a 1964 SEC rule, any Company with 500 or more 'shareholders of record' is required to file its detailed quarterly and annual reports with the SEC.

Facebook had tried its best to rein in the number of its shareholders - and had started issuing Restricted Stock Units (RSUs) instead of shares / share options after it had already issued c. 200 shares to its employees. RSUs aren't considered shares until the company goes public. Needless to say, this was cause for dissent among its employees back then. Even very recently, in January 2011, when Goldman Sachs infused $450mn to value Facebook at $50bn, the deal was structured such that the transaction would count as one shareholder's position. Having said that, Facebook doesn't have much to complain about, now that it's public. And here are the key reasons:

It's all about the Money: Add $16bn to Facebook's $3.9bn cash pile. It can fulfill its strategy of acquiring more users by buying out companies with niche services / applications, catering to an untapped user base

Tax Gains: Facebook stands to gain heavily on future tax payments, saved primarily on the vesting of RSUs and the exercise of options, which could be around $7bn. Facebook paid heavy taxes of ~40% on its pre-tax operating income in 2010 and 2011, way higher than the marginal tax rate of 35%. So looking at it another way, Facebook would get $1bn tax rebate on every $3bn of operating income for the next $20bn of pre-tax operating profits

Zuckerberg in Charge: Zuckerberg has 28.2% stake ownership after the IPO, but still retains 55.9% voting rights thanks to the issue of Class B shares with 10x voting power compared to the Class A shares offered through the IPO - meaning that Facebook is a Controlled Company with no Independent Directors

All in all, a great deal for Zuckerberg and Facebook. Whether it's sweet for investors, my take is: Nope. Not for the near term. And if you're looking at a one-year horizon, a $47 share price is likely - strictly on a fundamental valuation basis.

I'll discuss in detail on my valuation model and IPO pops in following posts.

Cheers,

AJ

ARBA SAP ORCL

When deals like this happen, you know for sure that wars are all about the money.

On May 22, 2012, with SAP agreeing to acquire Ariba (a zero-debt company) for an EV (enterprise value) of $4.3bn, it's paying $45  /share, at a premium of ~20% more than Ariba's May 21 trading price. SAP plans to fund this transaction from free cash on its balance sheet and a $3.1bn term loan facility

This is a landmark deal primarily because:

• After Amazon, Ariba is the world's 2nd largest cloud vendor
• Ariba has the largest global trading network and drives a massive $319bn of commerce transactions b/w 730,000 companies (Ariba will add tremendous value to SAP, when SAP already is in a position where 63% of the world's transaction revenues touch an SAP system)
• With this deal, SAP is headed to become the leader in SRM (Supplier Relationship Management)
• Ariba has grown at 39% yoy in revenues in 2011 ($444mm)

With this deal, it's taking on prime competition, Oracle, big time.

For that matter, Oracle's acquisitions have also involved huge money - and not to discount, really strategic buys. Last year, it acquired cloud-based talent management company Taleo and CRM provider RightNow for $1.9bn and $1.43bn respectively - gigantic!

And here's the fun part - On May 23, 2011 - just a day after SAP's Ariba acquisition, Oracle announced a $300mm acquisition of Vitrue ("We help brands amplify their social message"). 

Nothing immediate happened to Oracle's stocks. Vitrue is a cool company though - privately held and backed by the likes of General Catalyst Partners, Comcast Ventures, Dace, Scale, Turner Broadcasting System and Advent - and has raised $33mm in 4 rounds of venture funding.

It'll be an interesting battle to witness

Cheers,

AJ

Sources:

http://www.crunchbase.com/company/vitrue

http://www.sap.com/corporate-en/investors/pdf/SAP-2012-Ariba-Acquisition-Presentation.pdf

http://in.finance.yahoo.com/q?s=ARBA

About

This is where I pen my love for businesses and their growth stories. I am fascinated by charts and the markets that bring them to life.

I'm also a huge Damodaran fan, although I don't belong to any particular school of thought. Even as I enjoy fundamentals based valuations, I find myself drawn to thrills that can be enjoyed sitting only at a prop trader's desk.

Hope you enjoy the contents of this website.

Cheers,

AJ