I am not getting any signals to suggest that its a value trap. Some of its verticals are not performing that well, like sugar and chlor alkali. But, I havent bought DCM Shriram Consolidated for sugar/chlor alkali.

 

I am in DCm Shriram Consolidated for their 275 MW power plant and their seeds division. At 773 crore market cap, to have 275 MW power capacity and seeds divsion having a revenue of 202 crores, is pretty cheap.

 

Also, I am not that averse to commodities. They have their up and down cycle, and even though I have never gone for standalone sugar company in a significant manner, but during good times, they earn huge enough to take care of rainy days.

 

The thing is, the management is a pro-active one. The company has done all the correct things with the cash flow they hve generated. They have reduced borrowings, added fixed assets. Quarterlies were disappointing, no doubt, but I dont think it was so bad as to warrant a hammering a stock having a book value of 70+ to 45-odd levels.

 

This sell-off may last for a while and hence I wouldnt like to go too big on this one at this moment. But its on my constant watch-list.  

 

Regarding diworsification, I have nothing to say. The reason why companies diversify is to balance the ups and downs of individual sectors. Imagine, if DCM would have been a standalone sugar company, this company's financials would have gone out of shape. Or, if it would have been a retailing company( just HKB) only, it would have only promises to show and performance to hide.

 

Sure, as investors we are not just satisfied with cash profits with negative net profits. But I doubt, whether we can over-turn all the good performance they did in December quarter with whatever wrong happened in March quarter.

 

I dont think their diversification lacks focus. Their businesses have done well till last quarter. Its not fair to blame last quarter's results on diversification. They have structured swing capacity in their chlor alkali business so as to manage any downturn in business with power generation business. They make cement from the waste of the calcium carbide business. Agribusiness verticals are also inter-related and are extensions of offerings. The business of fertilisers, seeds and agri-inputs are quite inter-related and there's nothing wrong in that. Infact, HKB is also an extension of this vertical.

 

As far a the note about cane prie accounting is concerned, its there is almost all the sugar companies having plan in UP.

 

Kindly dont infer that I am trying to DCM Shriram Consolidated's advocate. Infact, I was pissed off to see a loss for this quarter. But as investors, we should try to locate what has gone wrong. DCMSCL had a very good December quarter also. I believe its time when we should markets to do whatever its doing and we should be prepared to take advantage of any big mispricing. Mispricing is already there at CMP but it can get bigger because sometimes markets tend to over-react.

 

You can say I am being optimistic and I may say I am being not too pessimistic. But we have to be neither of them, and we should try to be realistic. We should react to what markets are doing.....sure, there can be a potential loss around, but stock markets have never been predictable.

 

Also, dont ignore that this company is now almost available at almost 3 times cash earnings. Thats not incredibly expensive.

 

Apparently yes......

 

But I guess we shouldnt leave just at this point of analysis. EV/EBITDA would be high when the company is on aggressive expansion mode. Thats because money is getting tied up in assets which are not generating immediate revenues( and hence no question of profits, therefore contributing nothing to EBITDA). They are putting money in spreading the reach of HKB, and are opening stores quite aggressively.

 

Actually, I am not looking at anything apart from unencumbered cash flows. The msot important thing for a business is cash flows. Efficiency ratios would get better with better cash flows. The important thing at this moment of time is to make the fledgling units full-blooded, even at the cost of efficiency. And cash being the blood of any business, I think they can achieve their goal if they can manage sufficient cash flows. On that criteria, its not very expensive.

 

Good development....so while its stock price my continue to be low, its a time when it is preparing for a good show in the future.

 

Also, chemicals and power should do a better performance this year. But, sugar may continue to be a drag.

 

Also, I guess we need to be a bit patuent with DCM Shriram Consolidated. And thats nothing to do with its price performance, but because some of its main business are in a germinating state.

 

 

Actually its difficult for us to take a call on whether we should like a hive off or not. After all the years and money the company has spent on HKB, it would be unfair to hive it off when the fruit is about to ripen. But if its clear that the fruit is a rot, then hive off is better.

 

The thing is, we are not not having any first hand experience of their stores. Media reports can be biased, and shouldnt be relied upon too much in making a decision about the stock. Also, most of their products are not very much visible in urban areas.

 

But, the agri-business has done pretty well. HKB has incurred more losses.

 

Things are not expected to improve in the next quarter as well, although argi-business should be reporting fantastic numbers thanks to good kharif season. Sugar division losses needto be curtailed though....urgently, otherwise everything is getting leaked out.

 

More than hiving off, I want that to be scaled up first. But for that to happen, they need the finacial support provided by other divisions( which unfortunately didnt happen this quarter)

 

Sugar is a critical division for them. And I am pretty sure they must be taking a hard look on these numbers. In a team( consolidated company), if one players performs so miserably, the team should take immediate rectification measures.