Manugraph

The stock’s dividend yield is enticing, but investors must take the long term economic environment into account before betting on it

MANUGRAPH India has emerged as the country’s leading manufacturer of web offset printing machines. These machines are used for printing newspapers and periodicals and the company has benefitted greatly from a media boom in India in the last few years. Manugraph claims to control nearly two-thirds of the domestic market. Right now it is in the process of further augmenting its product portfolio.

However, the stock has taken a heavy beating on account of global economic slowdown, which has adversely affected the growth plans of print media and depressed the demand for new printing machines. The stock is down more than 80% in last one year but the dividend yield (based on FY08 dividends) has shot up to 12% nearly. This makes it an interesting bet for risk averse investors as company is expected to maintain the pay-out at last year’s level.

Business

The manufacture of printing machines of different configurations is only business line of Manugraph India. The company derives close to 30% of its business from its export sales and rest from domestic business. There is hardly any competition in the organised sector, and most of the competition comes from either the unorganised segment or foreign manufacturers. In the past six months or so, the company has suffered some setback due to the global recession, and the management has admitted cancellation of few orders by some of its overseas clients. This has led to piling up of inventories and higher inventory carrying costs, thereby forcing the company to operate its two units in Kolhapur for five days a week, instead of six days. This would affect the profitability of the company in the second half of current financial year.

Financials

An adverse impact arising out of above reasons was visible in September ’08 quarter as company’s net sales slipped by 15.3% to Rs 93.4 crore on a year-to-year basis. Even the company’s income from other sources saw a major decline and it fell to Rs 4.2 crore from Rs 11.6 crore in the corresponding quarter a year ago. The company suffered a mark-to-market foreign currency loss of around Rs 5.4 crore during the quarter. The company’s net profit slipped to Rs 13.7 crore from Rs 19.66 crore in the second quarter of FY08.

Valuation

In the light of the global economic slowdown, Manugraph is likely to close FY09 with net profit of around Rs 50 crore, which would be at least 20% below its last year’s net profit of Rs 62 crore. The second half of FY ’09 is likely to be tougher than the first half. However, considering its low debt-to-equity ratio of less than 0.5 and strong cash flows from operations, the company appears to be well-positioned to withstand the current slowdown and emerge stronger when upturn comes. At its current stock price, the stock has a dividend yield of nearly 13%, more than current yield on bank deposits. Even with estimated net profit of Rs 50 crore, the company is likely to sustain a 200% dividend payout (same as last year) even in FY ’09. This makes Manugraph a good bet from dividend yield point of view. The only risk, being a faster than anticipated deterioration in the global economic environment.

Beta: 0.71
Institutional Holding: 14.04%
Dividend Yield: 12.80%
P/E: 1.58
M-Cap: Rs 95 cr