A brief note on correcting Indian higher education system

Today I am going to write something other than stock recommendation.
I have chosen to write about steps that needs to be taken to correct higher education system in India. These are broad suggestion and I believe addresses most of the issues. I request readers to put up their comments or suggestion regarding the same.

There are 3 major problems in Indian higher education system which are lack of adequate capacity (no. of universities), poor quality of education and accessibility of education by poor. The thrust to improve education system should come mostly from local gov’t authorities as private participation is low.

Reduce entry barriers in education sector to attract private investment
Private participation in education sector is small (relative to nearby countries) due to high entry barriers like complicated procedure for setting up new university, poor availability of funds and long gestation period. To improve education penetration in India (8% vs. a standard of 20%), the concerned authorities should simplify the procedure for setting up new university, increase spend on education sector through private/public participation and allow Foreign direct investment (FDI) in education sector. The gov’t need to allocate more funds than usual for setting up new universities to meet current deficit and rising demand for higher education.

Upgrade educational infrastructure, teaching staff, grading system
Besides setting up new capacities in education sector, concerned authorities should not lose focus on quality of education being imparted. India has second largest number of engineers and doctors globally, but the quality of manpower remains low on global standards and as a result most of the talent available in not usable. This is due to poor educational infrastructure, outdated teaching staff, lack of industry exposure and inappropriate grading system. The authorities should work on upgrading the existing civil and information technology (IT) infrastructure (such as building a local area network between universities) and set strict guidelines for new universities. Teaching staff skills can be improved by setting up research centres within universities and increasing compensation to attract more talent. Regular industry interface, visits and internships should be made part of curriculum to make the students industry ready by the time they complete higher studies. The grading system should be standardised across universities and greater emphasis should be laid on practical knowledge to encourage problem solving rather than rote learning.

Make education affordable
Though, increasing educational capacity and upgrading quality can reduce cost of education to some extent (increase in supply reduces price), some more initiatives needs to be taken by regulatory authorities to make education cheap and affordable. These include granting more scholarships, subsidies, increase availability of financing education and encourage other industries to support educational institutes (for eg. IT industry should setup universities to train workforce as per their requirement).

Ess Dee Aluminium: Packaging a punch

Ess Dee aluminium produces packaging made from high-quality aluminium foil and polyvinyl-based film for use in the rapidly growing Indian pharma/FMCG sectors.

The story here is that the company is producing something which has huge shortage in local market (50% of aluminium foil requirement is imported). Thus, Ess Dee is benefiting from import substitution. The general industry growth is 10%. Ess Dee currently has 30% market share and 20% is with unorganized/other producers.

Aluminium packaging industry has high entry barriers. Since the product is touches medicines and food products, the customer demand utmost quality products and getting an approval from customers takes 3-5 years. Pharma sector forms 70% of Ess Dee sales and rest is from FMCG companies. Ess Dee has over 200 pharma companies as customer.

Capacity addition is key requirement for growth, Ess Dee has proven track record
From 2004-2009, Ess Dee increased capacity through organic route by 5 times to 18k tons. In 2009, Ess Dee doubled its capacity to 37k tons by acquiring a sick company India Foils (inorganic growth). In past 1 year, Ess Dee quickly turnaround India Foils operations against investor expectation. The capacity from India Foils will now come in phases over next 2 years. Thus, sales for volume for Ess Dee will double in next 2 years (In FY10, it sold 19k tons). Ess Dee has recently raised Rs800m to set up new capacity of 12k tons in next 2 years.
The company top line is growing exceptionally well.

What about bottom line:
The company has stable EBITDA margin (cash profit before tax, interest and depreciation) of Rs1 lakh per ton and all the cost (mostly aluminium foil) is a complete pass through. Thus, any movement in aluminium price does not affect the margins on per ton basis for this company.
The company made a profit of Rs100cr in FY10. This year, I expect it to report a profit of Rs200cr and Rs260cr next.

Ok, earnings look good, how is balance sheet?
Despite huge expansion, Ess Dee has a strong balance sheet with a debt-equity of just 40% (debt of Rs150cr). Most of the debt is for working capital (i will touch this aspect later). Ess Dee has always resisted of keeping too much debt on books and has financed its growth largely from internal cash flows and share capital. It first raised money in 2007 and has recently raised again to fund new capital expenditure.
The reason for low capital requirement is due to low pay back period (about 2-3 years).
The company has high working capital requirement as it sells to pharma companies. Pharma companies generally pay after 6 months of sales. Average receivable days for Ess Dee is 160 days. They were slightly higher up to 200 days in 2010 because Ess Dee offered high credit days for selling from India foils, but the management is guiding that these will reduce to normal level these days. The high receivables is a key risk to earnings.
Current working capital for EDA is Rs230cr and will have sufficient cash flows to fund further working capital.

I like the story, what is the price?
As the company trading history is not new (first listed in 2007), one should not value this company on historical valuation. Generally, packaging companies trade in range of 8-10 time PER (Investopedia has explained PER very nicely!).
The company current market cap is Rs1500cr implying a PER of less than 8 times (based on my earnings forecast).
The company is available cheap with a high growth. I expect the stock to at least triple in next 2 years from here due to strong earnings growth.

Ess Dee is a first generation company and management has strong experience in this field. The company was started from scratch in 1994 and has now become largest producer of aluminium packaging.

NB Ventures, a potential multibagger

In this blog I am going to write about some good value stocks with strong business model and are available cheap on stock markets. These picks are yet to be discovered by investors. I will try and simplify the story for you but, if you feel confused or need some clarification, just drop a reply. feedbacks/comments are welcome

Coming to the point, My first value pick is Nava Bharat Ventures (NBVL IN) and this company is like a cash cow (keeps generating substantial money). The company is into power generation business with small portion of earnings from ferro alloy business.
The company was set up in mid 70's as an alloy and sugar producer but changed its strategy to focus on lucrative and high growth utilities business. The company first ventured into power in 1993 for using it for captive requirement to produce alloys. In 1997, the management observed that producing and selling power is better than cyclical alloy business. thus, NBVL ventured into power business.
Over past decade, profit from power segment has increased many folds and now forms 75% of total profit from nil in 1997.
The company is now focusing only on power business and has charted out an expansion plan to triple its capacity to 900MW in 3 years.
The company has its own coal reserves insulating its against coal price movement.
I forecast earnings for NBVL to double in next 3 years from slightly over Rs5bn this year.
The company has a market cap of Rs31bn, which means it is trading at a PER of slightly over 5 (a yield of 20% pa).
This is without considering growth. Now, lets say the earnings double to Rs10bn, then yield is close to 40% which is among the highest for any utilities company.
The reasons for low valuation for this company are simple, investors have not yet appreciated NBVL transformation to utilities play from commodities play or are concerned about execution part on management. The company has over a decade experience in setting up power plants and I believe execution risk is quite low.
PER of 6 times is a throw away price for any energy company globally and in India where there is huge power shortage, this is funny. Generally power companies trade more than 20 times as earnings visibility is high for power companies. Commodities such as steel, aluminum, copper etc. company trades at PER of 6 times.
Thus, I believe this company has substantial upside over long term and could prove to be a multibagger. Key risk includes a meteorite destroying their power plants or management fraud.
The company has strong execution skills, surplus cash and strong internal cash flows to build new power plants.
The risk to rewards are very high and I recommend a strong long term BUY for NBVL. For traders, please ignore if you have already read this. however, if you find a trading strategy, please advice.

I call this cash cow, because it will generate huge cash every year and build more new plants to generate even higher earnings. Currently, the stock of NBVL is trading at Rs410/sh and I see them rising over 5 times to Rs2,000/sh in next 4 years.
Thanks.