Sunday, April 11, 2010

Stock Idea - India Motor Parts and Accessories

As promised, here is the first stock idea. I will try  to delve into quantitative and qualitative data that i was able to glean from financial statements and annual reports. I am  a young investor with loads to learn ,so  don't expect a thorough analysis like some stock analyst . This is an attempt to apply whatever i have learnt till now  to analyze a company and figure out whether its worthy of an investment.

India Motor Parts and Accessories Limited (IMPAL) a TVS Group Company  is engaged in the distribution of automobile spare parts and accessories through its 50+ branch network representing over 50 manufacturers. IMPAL is one of the few all India distributors of motor parts and deals in engine group components, brake systems, fasteners, radiators, suspensions, axles, auto electricals, wheels, steering linkages, instrument clusters etc.Now lets dive into the financial statements of IMPAL and see how good or bad the business is.

The company has maintained a healthy current ratio of well above 2 for the past 5 years. The quick and cash ratio are also well above 1. Also ,the cash conversion cycle  is very less and came down drastically in 2009 to about 3.5 from 17. All this means that the company is well placed to tackle any short term obligations with ease.
Gross profit margin of IMPAL has hovered around 10% for the last five years indicating the competitive nature of the industry. The presence of unorganized players in the sector puts a squeeze on the margins and the company finds it hard to pass on costs to the customers. Net profit margin is around 4.5-5% with 2009 being an exceptional year touching 5.68% . However despite low margins the Asset turns are high well above 2.5 resulting in Return on Assets(ROA) in the range of 12-15%.With very little leverage the Return on Equity(ROE) ranged between 12.7-18% . However ROE can be misleading with a company like IMPAL having a substantial part of its capital as investments. Investments are not employed in the day to day operations of the company and hence we need to look at a more suitable ratio - Return on Invested Capital(ROIC) . ROIC was well over an impressive 30% for past 5 years with 54% in 2009.

Financial Stability
IMPAL has a strong balance sheet with negligible debt although the debt/equity ratio has been going up over the past 5 years and currently stands at 0.14 . The interest coverage is very high implying little financial danger to the company due to long term obligations. This coupled with strong liquidity gives IMPAL the ability to survive any lows during the business cycle in the future.

Operating Performance
The company impresses with a Fixed Asset Turnover of well over 20 indicating the Asset light nature of the sector. Overall Asset Turnover is much lower at around 2.5 mainly due to the investments in the Balance sheet that drags it down. The Days Inventory and Sales outstanding has been reducing from the past 3 years whereas the Days Payable outstanding has remained around 30. The operating cycle has come down drastically  in the past 3 years standing at 3.5 days for 2009.

Cash Flow
It is in its cash flows that IMPAL impresses me the most. The company has posted positive cash flow from operations(CFO) for the past 5 years and more or less matched the profit after tax(PAT).The CFO margin is around 5% meaning the company is able to make 5paisa out of every 1 Rs of  sales.This is expected as the Net Profit Margin(NPM) too is around 5%. However one look at the most critical parameter the Free Cash Flow(FCF) reveals why IMPAL is a good if not great business to own.The Capital Expenditure(CAPEX) is abysmally low at around 0.3% of sales. More than 90% of the Cash Flow is converted to Free cash flow which the company can either reinvest in the business or payback to the shareholders. The reason for such a low CAPEX could be that all CAPEX for setting up new branches has already been incurred long back and it is just spending on the maintenance of existing branches. Its not clear from the Annual reports whether they have any plans of expansion in the future or not but if that does happen we can expect a rise in CAPEX and drop in FCF. The company seems to be beefing up its investments using the FCF and also paying a decent dividend.

Performance and Dividend
IMPAL's sales have grown moderately at a CAGR of 8.9% over the past 5 years and EPS has grown at 14.4%.This shows IMPAL enjoys a little operating leverage but the growth rates haven't been above average.The company has been a consistent dividend payer and the payout has been around 30%.Both CFO and FCF have also been growing at around 14% CAGR . Even the Dividend amount has grown at 14% showing a shareholder friendly management.

I'll not go into trying to value the company but will analyze how the company is currently valued w.r.t Trailing 12 month metrics(TTM). At the current share price of Rs 484 the Market cap of the company is 201 Crs which translates to a P/E multiple of 11.6 ,P/BV of 2.1 and P/CF of 13 and a dividend yield of 2.43%. Hence the company is definitely not cheap neither is it expensive. However IMPAL had an extraordinary 2009 and it would be foolish to extrapolate that into the future.It's always a good idea to look at Price/Avg EPS and Price/Avg  Cash Flow as it gives a better picture over a business cycle.The following table shows the TTM and Avg valuation metrics.

                TTM                    3yr Avg                  5yr Avg
P/E         11.58(6.5)          14.98(8.4)            16.9(9.48)  
P/CF       12.95(7.27)        19.78(11.09)         22.24(12.48)

Interestingly ,IMPAL has investments worth 63.22 Crs on its books. Out of this 37.85 Crs is in liquid Mutual Funds, 1390000 shares of sundaram finance worth 55.18Crs at current market price and 8.85 Crs Cash on books. All this adds up to 88.36 Crs of Cash net of debt(I have excluded unquoted investments worth 18crs). That means Rs 212 cash per share of Rs 484 in other words 43% of the companies market cap is made up of cash & investments and hence the market is valuing the company at only 113crs.While this can change as the share price of IMPAL and sundaram finance move its clear that more than 40% of the value is in cash.All of a sudden the valuation now looks much cheaper - refer to values in parentheses in the table above.

Risks and Conclusion
The immediate risk that comes to my mind is that the stock is extremely illiquid making it hard to build a position quickly. One will have to be patient to build a position. Also the illiquidity can mean that the Bid- Ask spread can be high which can impact returns.Also being a small cap the stock can be quite volatile both on the rise and fall.Further the stock is close to its all time high and  more than 2.5 times above its 52 week low and hence could correct if the market corrects. However the rally in the stock is quite justified given the strong performance in the last 3 quarters. Both sales and profits have gone up each quarter with net profit up 43% for the 9 month period compared to last year. The company has already achieved an EPS of 41.09 in 9 months (EPS for year 2009 was 41.77) which is an all time high. So looks like IMPAL is well set for another year of record sales and profits. Overall a good business and a value buy.

This blog has been named The Thrifty Investor since i want to be as thrifty/frugal as possible while buying stocks. In short, looking at the value one gets for the price one pays.So if you feel that IMPAL gives you a lot more value for the price being paid you can start buying or add to your watch-list to buy on dips.I invite opinions and views ,i would love to hear any kind of feedback both negative and positive and try to respond to doubts if any.

Disclosure: None . Please do read the Disclaimer