The central concern of all investors in their investment policy is to always ensure a “margin of safety”. The future is uncertain and no matter how good one is, the reality is that no investor, not even Buffett, can determine the exact intrinsic value of any business. Because the intrinsic value is derived from an investor’s assumptions, the value is merely an approximation. Yes, an investor as skilled as Buffett will probably have a better approximation of intrinsic value than most, but it is still an approximation nonetheless. This is why the margin-of-safety concept is of paramount importance.
As per Benjamin Graham, to have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.
Let’s put the above in perspective w.r.t. Jubilant Industries Ltd.
Jubilant Industries Ltd. is a Jubilant Bhartia Group company which counts amongst its group, successful Indian-listed companies like Jubilant Foodworks, Jubilant Lifesciences and AIM-listed Jubilant Energy.
Jubilant Industries was formed as a result of demerger of Agri & Polymer Business of erstwhile Jubilant Organosys Ltd. (now Jubilant Lifescience) because of which it automatically got listed on Indian bourses on February 14 2011. At the time of demerger, the implied valuation of the demerged business, based on share allotment ratios, was put at ~Rs. 300 cr, while the current market cap of the company stands at Rs 150 crore.
The companyâ€™s diversified portfolio includes a wide range of crop nutrition, crop growth and crop protection agri products, as well as performance polymers products comprising consumer products like adhesives, wood finishes, application polymers like emulsion polymers, food polymers and latex such as Vinyl Pyridine, SBR and NBR latex.
Importantly in the all the products the company deals in, it commands a significant market share and leadership position not just locally but on the global scale as well.
Jack Welch, the Chairman and CEO of General Electric between 1981 and 2001 once said that, “The winners in this environment will be those who search out and participate in the real growth industries and insist upon being No.1 or No. 2 in every business they are in. If not, then ‘fix, close or sell’ the business”.
The management of Jubilant Industries seems to be treading the same path as they recently discontinued the Applications Polymer business, which was proving to be a non-profitable operation.
Some notable points about the company
- Jubilant Bhartia group, is the promoter group behind the company
- Debt free status
- Cash and cash equivalents of Rs 50 crore (inclusive of Rs 13 crore investment in liquid funds) as at Sep’11 balance sheet
- Good profitable business in high growth segments of Agri inputs, consumer products and performance polymers with average profitability of Rs 25 crore (considering the volatility of Agri business which is susceptible to the vagaries of Government policies on fertilizer industry) against the enterprise value of Rs 100 crore.
- Book value of Rs 300 crore with net block constituting Rs 117 crore i.e. more than the enterprise value of Rs 100 crore (Market cap + debt – cash and cash equivalents).
- The company has in place built up capacity for almost all its products at 40% higher than the production for FY 2011. Thus, we may not see any major capital expenditure for another 1-2 years without hampering the growth across the segments.
The above points lend the all important Margin of safety at current valuations.
The company has already declared the results for the quarter ending the Sep’11. For the half year ending Sep’11, the company has already achieved a PAT of Rs 19.50 crore and considering the balance sheet as at Sep’11, its been a very good half year with cash flow from operations in excess of Rs 20 crore.
Considering no major change in demand and input prices, it would be safe to assume the Jubilant Industries will close FY 2012 with a net profit and actual cash flows in excess of Rs 30 crore.
However there’s more to Jubilant Industries, shall cover the same in the next article.
Ekansh Mittal – [[email protected]]