Guys I talked with BIFOs head Finance and queried him about the business for a more detailed look at the company and its operations. Most of below is my own knowledge of the industry, supplemented by the questions I asked them. BIFOs Raw Materials Roughly 60-70% of the Raw material is imported. There are two main locations of their suppliers- China and Europe.Whereas European materials are above par, Chinese supplies are much cheaper though faulty products tend to leak one. So although they rely mostly on Chinese supplies- sometimes certain legal or other problems force them to buy from the much more expensive European ones.For example Jan& Feb are the Chinese new year and they dont ship during this period. This fact is important because it highlights the reasons why gross margins have been showing relative fluctuation despite product tech and mix being largely similar YoY. With such a huge foreign currency exposure of supplies, BIFO is one the big beneficiaries of Pak rupee appreciation. In the last FY, the advantage of rupee appreciation was only fully realized in the last quarter. And this years first quarter was one of record high profits. With a stable dollar of around 95-100, benefit will be fully realized in much stronger GP margins this year. BIFO growth potential As it could already have been surmised, the Industry is in the maturity phase with demand being relatively stable. Major customers are E&P companies and cement manufacturers. Thus a drive towards greater exploration would result in higher revenues for BIFO. This is easily understandable since E&P companies have dug a record of 102 wells in a single year and BIFO has had a superb year with amazing profitability. That being said, there are still certain growth triggers ahead. The companies major sources of revenues also include sales made in the Saindak Copper/Gold Project and further ventures between the Chinese and Pakistan such as the Baluchistan Rekodiq( current disputes have halted work on the project) Gold Project and any dams-both big and small- built by the Government such as the Nehlum-Jehlum Hydel, Karakoram Highway expansion, Lahore-Karachi Motorway e.t.c Pricing and Competition One of the things I really like about the local explosives industry is that there are only 2 players WAHN, and BIFO- and both of them have strong pricing power. BIFO has been raising prices of explosives each year by 8-10% in line with Inflation, which is something a lot of price sensitive and regulated industries cannot do. Therefore even if we dont see a lot growth in terms of number of units sold, you can expect revenue, with trickle down effect in earnings, to increase significantly in nominal terms each year. With regards to Competition, BIFO has around 60-65% market share- with WAHN having the rest of the share. The good thing about the industry is that they are not worried about threats from cheaper or better quality imported explosives- simply because the legal and bureaucratic hassles of ordering explosives from other countries is so much that it is not worth it. Therefore customers are in a way forced to bargain with these two companies. The competition between BIFO and WAHN seems relatively calm, with both of them easily co-existing with each other. From what I know, WAHN has the upper hand on BIFO in terms of its production line- since it uses the more advanced technology for explosives. But WAHN being a government company has a too much red -taped culture. So when tendering for a contract BIFOs management can easily offer more discounts to customers undercutting WAHN, and for WAHN to offer similar discounts would first require a long time to simply get the approval since theres so much bureaucracy involved. Thats part of the reason why BIFO has been able to maintain its much higher market share. BIFO also seems to have satisfied employees. I conversed with some of them and they all seemed to be content with their pay packages and office lifestyle. Although the company undertook HUGE cost-cutting procedures these past two years( evident in its extremely good Net margins) theyve managed to keep employee moral afloat. [/list] Dividend Payout maintenance and CAPEX The thing I like about the company is that they dont hoard cash and attempt to diversify when they clearly know their own limitations. Management does not currently have the experience or the know-how to run another unrelated business and they havent tried to use the strong cash flow from this company to buy or build another one. Theyre smart enough to give that money back to shareholders who can do with it as they please. They claim that strong dividend will continue to flow as in the past unless some opportunity shows up in the explosives business. the BOD have good contacts in the E&P sector- being ex-directors of these self same companies. This is a family owned business, but clearly of a much better calibre than a lot of other Family owned/run business such as certain textile companies. The employees say that they run a professional environment and the CEO( who holds nominal small amount of shares) is given the prerogative to runt the daily business as he sees fit, instead of being a puppet in certain other family businesses. I was worried that since they pay out all the cash as dividends then it could be possible that they might be negating necessary capex expenditure which could haunt them later on. They assured me this was not the case, the machinery set up isnt that heavy and capex payments are looked after for. Although, they are building a new head office in Islamabad they wont use up too much of this years earnings since they already have substantial cash reserves built up-most of which are invested in mutual funds. Conclusion As is clear, I rather like this company and its management. The business is easily understandable and has a stable demand. For the long-term, barring any external shocks to the market, this company would easily touch new highs. However one must keep a long-term view since earnings will improve slowly, but steadily.
Posted on: Sat, 24 Jan 2015 10:01:33 +0000
Trending Topics
Recently Viewed Topics
© 2015