Balmer Lawrie: Long-term investment idea

Balmer Lawrie

Beta 0.89


Institutional holding 18.65%

Dividend Yield 4.5%

P/E 6.7

M-Cap Rs 728.5 cr

CMP Rs 447.2

The Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.

Business:

BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea.

The company is India's largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business.

Balmer Lawrie Investments (BLIL), which is 59.67% owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government's stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.

Growth Drivers:

Balmer Lawrie is a debt-free , steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this.

During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%

Financials:

The global financial slowdown hasn’t left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore.

The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants.

With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years.

Valuations:

The company's current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.