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Hedge Funds’ Political Cheques & Balances

Hedge fund managers in the US are usually regarded as supporters of the Republican Party. Not...

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Fanciful Hedge

Our scepticism about Tata Equity Management Fund in May 2006 has been justified. Lesson?...

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Killer Instinct

Sabero Organics has a global presence with key products in the crop-protection business

Sabero Organics Gujarat was established to manufacture specialty chemicals and intermediates for the crop-protection business. It started manufacturing crop chemicals afterwards. It has a presence in all the three sectors of crop chemicals—herbicides, fungicides and insecticides. The company has one or two key products in each sector: Acephate and Monocrotophos (insecticide), Glyphosohate (herbicide) and Mancozeb (fungicide). It is the largest manufacturer of two of its key products—Mancozeb and Glyphosate—in India and the second-largest in the world. Production of these two chemicals is backward-integrated as it produces yellow phosphorus for glyphosate and the entire range of formulations of Mancozeb-like granules, oil suspension, wettable powder, suspension concrete and blue-green Mancozeb. Sabero is manufacturing Chlorpyriphos, one of the largest-selling insecticides, since 2004. Since some of the older molecules have been discontinued, the demand for this molecule has increased, improving Sabero’s business. Another top-selling insecticide is acephate in which Sabero is a large player. In FY08-09, insecticide and fungicide segments contributed 34% and 39% of the revenue, respectively, while herbicide and specialty chemical sales accounted for 20% and 7%, respectively.  It sells products in 50 countries and has subsidiaries in Australia, Europe, Brazil, the Philippines and Argentina. In FY08-09, 65% of the revenue came from the international market. The geographical diversity de-risks the company from the vagaries of the market in any country and stabilises the revenue source.

Multinational companies are among the large customers of Sabero, contributing 35% of the revenue; 50% of sales comes from the domestic companies and 15% of sales are through its dealer distribution networks. Its strategy is to build formulations brands based on its technicals like Mancozeb (Emthane-45) and Glyphosate (Glyweed). India’s use of agro-chemicals is low and provides a huge opportunity. Sabero benefits from its presence in all the three sectors of agrochemicals with increased domestic use. However, only 20% of the market comprises patented products. Generic products constitute 35% of the market; 45% comprises off-patent products sold by innovators. There is a big opportunity for generic players like Sabero to grab a larger share from innovators. Branded products have been the company’s focus area recently. It has increased its dealer network. Registration is an important part of this business and it has tied up this year with a multinational firm to register as a source for its herbicide and fungicide products for all 24 European Union countries. The company introduced two new products in 2009—Propineb, a fungicide and Methamidophos, an insecticide—and aims to launch two new products every year. In FY10-11, capex is envisaged at Rs10 crore-Rs15 crore, indicating that there is no need for capacity expansion to increase sales. Business growth and the benefit of having a presence in multiple markets are reflected in its financials. Average sales and operating profit growth over the past five quarters were 46% and 72%, respectively. Sales and operating profit grew 25% and 115%, respectively, in the December 2009 quarter. Its operating margin is 17%. We first wrote about this stock in the Moneylife issue dated 16 July 2009, when it was trading at Rs29.50. Since then, it has gone up 181%. It is still cheap. Its market-cap is 0.64 times sales and 3.86 times the operating profit of the December 2009 quarter, respectively. Return on equity is a fantastic 30%.

Unquoted
Odyssey Corporation (Rs169)

Incorporated in 1995, Odyssey Corporation Ltd is engaged in providing services in areas like solar energy, property and financial management, fit-outs, interior design, project management and international property sales. Its fundamentals are terrible. The company reported an operating loss of Rs64 lakh in the March 2009 quarter on net sales of Rs3.72 crore. In the September 2009 and December 2009 quarters,  sales declined significantly to Rs11 lakh and Rs1.70 crore, respectively, while the operating profit was Rs4 lakh and Rs77 lakh, respectively. For unfathomable reasons, the stock has soared 590% between
27 November 2009 and 26 April 2010, from Rs20.50 to Rs141.40.

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