Let me thank Assik first for coming up with his queries regarding the above-mentioned company. I would really appreciate to come up with your views and the companies you are tracking to share on blog.

I am dividing this post in 3 parts. First I will talk about the quality then intrinsic value and lastly will present the aggregate of last 4-5 years data. So lets get started, as we have to study many numbers and evaluate business.

Ester Industries:

Lets start looking at the quality of this company. The amazing thing I found about this company was that none of the analyst or broker has done any research on it. So I am feeling great to talk about it first publicly about this company.

After reviewing its annual report for 2010-11 there were many things I liked about it. They are as follows:

  • I could not find any liquidity problem within this company, which is tick from my side.
  • Gross profit and operating profits are great, so another tick from my side.
  • I am also not worried about the cost of debt, as the company had made substantial profits last year to cover that cost. Another tick from me.
  • I am impressed by its Return on Equity, another tick from myside.

Now few things that I am concerned about:

  • Debt has increased last year but, Returns Company is generating are great. As long as they don’t leverage more, I am happy with their current debts.
  • I am not 100% satisfied with the cash flow they are generating at this stage. They are satisfactory but not strong.

Overall on quality we rate this company as A1. It’s a hidden gem for me.

Coming on the valuation side, the book value of the company is INR 43.32 and it’s trading at INR 48.05. Looking at the EPS for last year the company reported INR 20.58 that translates Return on Equity of around 75% for the year. Looking at those figures any investor would say that for sure this company is more valued then INR 48.05.

Looking at past of the company in 2009 –10 the book value of the company was INR 27.39 and EPS INR 4.43, that translates ROE of 18%.

For the year 2008 –09 the book value for the company was INR 24.29 and EPS INR 6.02, that translates ROE of 32%.

The past performance is not giving that confidence of stability to its profits but same time the performance are not to be ignore as they are one of the best. The biggest question arises what translated a sudden rise in its profits? To get this answer I started digging into annual reports and found that they doubled their capacity of production last year and that translated into higher sales figure then previous year. The other thing I found was the ban of gutka wrappers would affect its business by 25 –30% of local sales volume. To translate that information, expect 12-15% less sales figure for 2011-12.

Now if we translate all that information in evaluating intrinsic value of the company is as follows:

Ester Industries

Mar-11

Mar-12

Mar-13

Mar-14

Equity/share

43.32

59.78

74.58

90.18

EPS

20.59

18.5

19.5

21

ROE

50%

35%

25%

25%

Intrinsic Valuation

INR 488.37

INR 363.30

INR 254.68

INR 307.95

Current price

INR 48.05

INR 48.05

INR 48.05

INR 48.05

Discount

-90.16%

-86.77%

-81.13%

-84.40%

To explain this more in simple language, we are talking about the company who is almost trading for nothing for such a quality earnings where the company can pay back all of your investment in two and half year.

For long-term investor this is the perfect gem to invest and wait till others realise its potential.

Aggregate information for last 4 years for the company is as follows:

Share holders equity invested

INR 683.50 crore

Averaging INR 170.88 crore

Net profits

INR 200.79 crore

Averaging INR 50.20 crore

Net operating cash flows

INR 222.95 crore

Averaging INR 55.74 crore

Net cash used in investing

INR 292.01 crore

Averaging INR 73 crore

Net cash generated through finance

INR 74.78 crore

Averaging INR 18.70 crore

Interest and depreciation expenses

INR 100.41 crore

Averaging INR 25.10 crore

Something to remember about quality and performance ratings…

Rated A1, A2, B1, B2 and C, every listed company is rated based on a series of over 30 separate metrics, measured at both a point in time and over time. Most importantly, the Quality and Performance Rating is applied without any subjectivity. All companies are judged according to the metrics they generate. A1s have the lowest probability of a liquidation event. “Lowest probability” however doesn’t mean a liquidity event won’t occur. It just means far fewer A1s will have a liquidity event imposed on them compared to C. A liquidity event includes a capital raising, debt default or renegotiation, administration, receivership etc. An A1 company could of course raise capital if it needs to fast track construction of a new factory. Sticking to A1s and avoiding C’s should, over time, produce better returns.