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Tuesday, February 02, 2010

Pitti Laminations

August 24,2011: Pitti Laminations: Time to Dip in
Feb 21,2011: Pitti Laminations: Dec 2010: Result Review
Sept 10,2010: Pitti Laminations: June 2010: Result Review
June 05,2010: Pitti Laminations: March 2010: Result Review
April 15,2010: Pitti Laminations: Positive news flow in Moneycontrol
Feb 01,2010: Pitti Laminations: Dec 2009 Qtrly Result Review
Dec 29,2009: Pitti Laminations: Deep Discount: Indirect Power Play
Annual Report Pitti Laminations March 2009
Annual Report Pitti Laminations March 2010
Annual Report Pitti Laminations March 2011

Pitti Laminations: Quaterly Results Dec 2009 Review

Pitti Laminations has come out with its Dec 2009 Quaterly results.
The results on the face of it look to be poor here some numbers:
Gross Sales Dec 2009 (Dec 2008): 3935.56 (7571.77)- Down 48%
Profit From Operations : 496.58 (538.03)   - Down 7.7%
Interest : 283.71 (312.55) - Down 9.2%
Exceptional Items : 560.16 (0.00) - UP by 560.16 lacs (last year NIL)
Profit Before Tax: -ve 347.29 (225.48) - Down from profit to Loss
Taxes: -ve 2.37 (108.61) - Down due to -ve PBT
Net Profit: -ve 344.92 (116.87) Down from profit to Loss
Well it looks like a sea of RED and it truly is. One however has to do some more digging and we will see some new and interesting information which will help us get into the stock at a deep discount!!

Lets look at the numbers from a different angle.

1. Company's expenses as percentage of sales has dropped 5.85% from 92.73% (Dec 2008) to 86.88%(Dec 2009) this has resulted in Profit from Operations before Other Income, Interest and Expenditure to sharply increase from 7.27% (Dec 2008) to 13.12% (Dec 2009). This incredible feat has been performed even when the topline has decreased by 48%. This is a clear indication that the forward integration has been successful and value added products are directly improving the operating margins of the business.(my take)

2. Interest payments have jumped 3.26% from 4.23% (dec 2008) to 7.49% (Dec 2009) also the nine month numbers also show  a similar increase. If we however look at the actual numbers (in blue)we can see that the interest payments have reduced from 312.55 lacs (Dec 2008) to 283.71 lacs (Dec 2009) the sales (topline) numbers have skewed the ratio's.
- Another important development which helps me conclude that interest payments are not destroying the companies valuations is that the promoters have successfully got their pledged shares back. The pledged shares were 24,48,356 (Dec 2008) and now stand at 12,58,356 thats a return of 11,90,000 a reduction of 48% in pledged securities. (compay announcements to BSE also confirm this payback of debt)

3. Exceptional Items increased to 14.8%(Dec 2009) of sales from 0% (Dec 2008). This is truly the main ingredient of the smoke screen responsible for depicting a poor performance by Pitti Laminations. The management has provided further explanation of the exceptional items as follows:
- "A seperate agreement has been entered into with GE agreeing to bear the cost relating to Engineering analysis for repair procedures, actual repairs and other associated costs for an aggregate sum of USD $1.2 million equivalent to 560.16 lacs, the liability of which has been recognised as an exceptional item of expense in the financial results of Q3"
- "The company is finalising a fresh agreement with General Electric Company (GE) for sale of its products for an aggregate value of $36 million USD commencing from January 2010"

The 560.16 lacs expense reported as an exceptional item which means it should be one-off expense and company management has also clarified that it is expected that Pitti Laminations will be given future orders worth 36 million USD (168 Cr) having said that I must confess large corporations like GE can easily arm twist small companies such as Pitti Laminations and I hope the exceptional expense remains an exceptional item and does not become the "rule" (keep a watch for this in the future)

Conclusion: Pitti Laminations is definitely a very good buy at these valuations as operating margins have improved (and the stock has dropped!!). Its cliente list in India and abroad is pretty impressive. Operating margins are also looking healthy and expect the company to easily quote at one times sales 250Cr (when operators enter the stock !!  Psst .. Psst Operator !! Hello Hello!!..)

GE Exceptional Item is good and bad. Good if this provides value addition to Pitti's ability to deliver better products. Bad if this is plain arm twisting by big brother and a handme down of expenses for doing business with GE and could be a regular expense item.. however I would still place my bets with Pitti Management and recommend it as a good value buy at these levels to be a multibagger.