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Thursday, 15 August 2013

Deepak Spinners - A blended yarn company, couldbe a Multibagger

Current Stock Price Market Cap
Fair Value Long Term Target Multibagger Potential
 Rs.28  Rs. 20.1 crores Rs. 55  Rs. 88
One of the most undervalued companies on PE basis. Could appreciate from here.
BSE Code: 514030

Deepak Spinners is a lesser known Synthetic Blended Yarns using Polyester, Acrylic and Viscose fibres. Its manufacturing units are located in Solan District, Himachal Pradesh and Guna, Madhya Pradesh with a total installed capacity of about 63,552 spindles along with 5.0 MW biomass (rice husk) based power plant used for captive purposes. In FY 2013, it has also commissioned a 2 MW Solar Power plant in Rajgarh, Madhya Pradesh as a measure of diversification.


Financials (Rs. In Crores Except Ratios) Historical Stock Performance
Year Revenues PAT EPS EBITDA Dividend DEBT Equity Debt to Equity Low Price High Price Low PE High PE
2009 134.34 -2.74 -3.8 7 0 79.75 54.78 1.46 6.25 19.5 -1.64 -5.12
2010 203.83 -10.91 -15.15 1.82 0 78.14 43.87 1.78 7.83 18.4 -0.52 -1.21
2011 262.36 6.29 8.73 22.08 0 74.43 50.16 1.48 15 24.6 1.72 2.82
2012 283.54 7.61 10.57 24.96 0 62.28 57.76 1.08 12.76 20.9 1.21 1.98
2013 312.02 12.99 18.04 34.95 0 110.9 70.75 1.57 15.65 28.65 0.87 1.59

Currently the stock is available at an unbelievable 1.55 PE (trailing) but given the good pricing for blended yarn, I expect Deepak Spinners to repeat its record performance for this year too. Having said that, its in a pure cyclical business. Thanks to good cotton yarn prices, recently consumers preference have turned to synthetic blended yarn which are comparatively cheaper. Blended Yarn manufacturers like Deepak Spinners, APM Industries appears to be in a sweet spot as their raw material prices are stable but product prices are stronger and hence good margins and record profits.
For the past 3 years, inspite of good profits markets seems to be in denial mood with regards to their profit sustainability or genuineness of earnings  as they had also made losses in the recent past and there have been no dividends. But it used to be an average dividend paying company till FY 2007 and only after it started making losses in 2008, 2009 and 2010 it had stopped paying dividends maybe the management might have felt the need to shore up net worth and save resources for expansions.

In the last cyclical boom in stock price, it had traded at a high PE of 4.9 in FY 2004 and FY 2005 and I feel if the markets give similar PE for the record earnings of Rs. 18.04 EPS the long term stock price target comes to Rs. 88. At current market price it is trading at just a PBV of 0.28 which is also attractive enough for a commodity type company. It should over a period of time appreciate back to atleast 0.5 PBV and hence the fair value target of Rs. 55

Deepak Spinners Multi Year Stock Price Chart
Similar to the spectacular Multibagger returns which the stock had posted from its lows in 2003 to its top in 2006, I expect a similar event for this stock too as fundamentally it looks very cheap and it should even breach its previous record closing of Rs. 63.5 as the profits have been spectacular. The stock chart is also showing a gradual uptrend. But I feel the key event to be watched are its quarterly results and it needs to be seen whether they can maintain the same record profits. The risk of downside is definitely there if the profits were to fall.


2 comments:

  1. Hello. I'm interested in looking at this closely and to compare it with Nitin Spinners.
    Kindly review Nitin Spinners, would appreciate to have your views on it.
    I'm trying to e-mail you a note on Nitin Spinners that I posted on another blog.

    Thx, Keval.

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    Replies
    1. Your analysis is indeed interesting, well written and I have also given a link to it at the end of my post about Nitin Spinners. For comparison I've also written about PBM Polytex also. I feel PBM Polytex is much better with regards to discounted valuation, dividend yield, financial performance and balance sheet strength in the same Cotton Yarn Industry.

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