Arbitrage: Gwalior Chemicals Ltd

Gwalior Chemicals sold its chemical business to lanxess for 500 crs and planning to give 100 cr back to the share holders. First 50 crs was to be given through buyback but the offer price of Rs 120 failed to entice the market and the its market price fell by 10% from Rs 95.

Links to study:

updates on buyback timeline

failed buyback offer

Sale of chemicla plant

The market price is 71,  41% discount  from the buyback price

Castrol

I am looking at castrol's fundamentals. If invested the dividend yield is more attractive than a interest from a bank. The later being taxable. The trend of dividend is even more beautiful. I have interest to acquire a few shares of it.

The incremental return on retained earnings is always on the positive side and shows its intelligent deployement of capital.

Decription:
Castrol India Limited is an India-based lubricant company. The Company manufactures and markets a range of automotive and industrial lubricants. The Company markets its automotive lubricants under two brands: Castrol and BP. The Company operates in segments, including passenger car engine oils, premium two-stroke and four-stroke oils and multigrade diesel engine oils. The Company offers CRB Plus, CRB Turbo, CRB Prima and CRB Prima Plus for the diesel oil industry. The Company's brand names include GTX, Super TT, CRB, Magnatec, Activ and CRB Plus. Its BikeZone is a multibrand motorcycle service, which services two wheelers. As at December 31, 2008, the Company had 119 BikeZones in India.

Note:

The business is sound and the yield looked sweet but the price I bought was too high. I have sold it  as I needed funds to invest in others companies. Probably will buy it again when the price is 15 times its earnings.

Companies with sustainable competitive advantage

• Bharti Airtel [negative working capital]
• Castrol
• Glaxo smith kline pharma [had negative working capital till 97; no debt]
• Hero honda [negative working capital]
• Hawkins
• Lanxess now Styrolution ABS 
• Nesco: No Debt, Largest exhibition center in Bombay, Making use of its land resources as rental income.

GSFC

About GSFC


G.S.F.C. is one of the largest fertilizer manufacturing units in Asia, which was incorporated under companies Act 1956, on 15th Feb, 1962. G.S.F.C. was established with the objective of enhancing food production in the state of Gujarat which was food deficit at the time.

G.S.F.C. instant strive for products diversification on and value addition has created an product mix ranging from more than 24 brands of fertilizer to petrochemical, chemical, industrial gases, plastics, fibers and other products.


Translating G.S.F.C.'s philosophy is its vast network of plants that make its possible. This infrastructure took its first step in1967 with the setting up of 6 plants with an initial investment of Rs. 40 Crore. These six nitrogenous and phosphatic fertilizer plants started production of: ➢Ammonia
➢Urea
➢Ammonia Sulphate (AS)
➢Di-ammonium Phosphate(DAP)
➢Sulphuric Acid

➢Phosphoric Acid

Formation and growth


1969 – First Expansion The expansion of Ammonia and Urea production began with Phase II in1969 and an investment of Rs. 23 Crore. Was made to meet the increasing demand for Nitrogenous fertilizers.

1974 - Phase III Phase III began in1974 when diversification of products occurred. Plants to manufacture Caprolactam, Melamine, Nylon-6, Oleum - SO2 and OXO - Synthesis Gas unit and Purge Gas Recovery Unit were set up. With Phase III, G.S.F.C. became India's first & only Melamine producer. This provided the boost for further diversification to Nylons / Fibers / Melamine / MEK-Oxime and industrial gases like Argon Gas & Oxon Synthesis Gas.

1989 - Further expansion and diversification Three Co-generation units using LSHS and Natural Gas were set up. Also further expansion of Ammonia and Caprolactam production was initiated. Diversification into Fibers, Nylons, and Acrylic was completed and a DAP plant was also set up. This extensive diversification and expansion drive has been fuelled by G.S.F.C.'s compelling need to ensure full utilization of available resources while also maintaining its profitability and leadership status.

Composition


➢49% of State Government participation
➢51% of Public and Financial Institutions Today,

➢The Government’s involvement has come down to37.84% as on31st March 2009

GNFC: One of the Joint Venture


Gujarat Narmada Valley Fertilizers Company Limited is basically a joint sector company, with GSFC and Gujarat Government, holding 26% and 25% of the share Capital, respectively. GNFC is the largest fuel- based Ammonia plant and was the first largest single stream Urea plant in the world when commissioned. This project was set-up at Bharuch in the industrially-backward area with an investment of Rs.445 Crores and now it has become the largest complex among other industries by major diversification not only in fertilizers, but also in industrial products.


Analysis

Trading below 240 its book value for 09, guess I overlooked this stock and chose GNFC. I failed to realise two could have been better than one. The fundamentals of GCFC looks attractive. It has done a great job in reducing the debt levels to almost nil. For the eps of 62 and the cmp of 220, eps/cmp works around 28 %; and the roe/cmp is around 26%. If the earnings at current levels are sustainable then it is a good buy.

References: Project work by Vivek Negandhi on GSFC

Airtel: Negative Working Capital

It makes sense to identify individual securities that trade at levels that provide a solid margin of safety.

The number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.

Calculating Working Capital

Working Capital is the easiest of all the balance sheet calculations. Here's the formula.

Current Assets - Current Liabilities = Working Capital

One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

Negative Working Capital Can Be a Good Thing for High Turn Businesses

Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available.

A company that makes heavy machinery is a completely different story. Because these types of businesses are selling expensive items on a long-term payment basis, they can't raise cash as quickly. Since the inventory on their balance sheet is normally ordered months in advance, it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold, it may be too late). It's easy to see why companies such as this must keep enough working capital on hand to get through any unforeseen difficulties.

Note: 

I bought and sold of this stock as the ratio of price over earnings was too high. I hope the price comes down to reasonable levels.