Arcotech Ltd. was established in 1981 for manufacturing internationally acceptable quality of Copper & Brass Strips and Foils. It has become one of the leading manufacturers of Copper/Brass Strips and Foils in India by creating a niche of producing micro thin foils up to 0.04 mm with close tolerance.
The company has now expanded and increased its product range to include other Non Ferrous alloys like Phosphor Bronze, Nickel Silver, Nickel Brass, Cupro Nickel, Aluminium Bronze, Tin Bearing Copper and Silver Bearing Copper etc. These are produced in the form of semis like ingots, strips, sheets, plates, foils, copper bus bars in India. They have plans to broaden the range of products to include thingslike tubes, coin blanks, rods and wires.
Arcotech is contemplating to set up a green field project in the state of Gujarat, India to manufacture Aluminum semis. This will be an integrated facility and will prove to be a synergy to the Copper division. Aluminum demand has been growing at 10% CAGR since last 5 years and is expected to grow at 15-17% for the next five years in India.
Let's take a look at the company's financial performance:
The company has now expanded and increased its product range to include other Non Ferrous alloys like Phosphor Bronze, Nickel Silver, Nickel Brass, Cupro Nickel, Aluminium Bronze, Tin Bearing Copper and Silver Bearing Copper etc. These are produced in the form of semis like ingots, strips, sheets, plates, foils, copper bus bars in India. They have plans to broaden the range of products to include thingslike tubes, coin blanks, rods and wires.
Arcotech is contemplating to set up a green field project in the state of Gujarat, India to manufacture Aluminum semis. This will be an integrated facility and will prove to be a synergy to the Copper division. Aluminum demand has been growing at 10% CAGR since last 5 years and is expected to grow at 15-17% for the next five years in India.
Let's take a look at the company's financial performance:
Arcotech Ltd. Financials
Arcotech has grown remarkably over the past few years, although from a bottom, as copper prices declined significantly during the meltdown in 2008. And that is my major objection, I usually avoid cyclical industries like this, the company has executed well but should a recession come I believe they are toast. Arcotech is trying to diversify it's operations, but it's still relying heavily on copper. Furthermore, margins have declined almost every year, which is a result of intense competition from bigger players like Sesa Sterlite or Hindustan Copper.
Valuation
I did a three stage DCF valuation with the following assumptions:
- 1st stage profit growth of 25% for the next 5 years
- 15% for years 6-10
- 4% terminal growth rate
- discount rates of 12%, 14%, 16%
Valuation
I did a three stage DCF valuation with the following assumptions:
- 1st stage profit growth of 25% for the next 5 years
- 15% for years 6-10
- 4% terminal growth rate
- discount rates of 12%, 14%, 16%
Arcotech share value
I believe that given it's small size and rapid growth, rates of 14% and 16% are more applicable. Based on this, Arcotech offers only 16% upside in a positive scenario (with a share value of 419 Rs.). That is, if it grows by 25% and 15% respectively. Valuing cyclical companies with DCF is always tricky, as the earnings might wildly fluctuate. The stock is currently selling for a P/E of 23 and P/S of 1.2.
Summary
I didn't purchase Arcotech for a simple reason: it has no competitive advantage. It might have grown fast, but there are limits in the industry with extremely narrow margins. As Warren Buffett said: "Time is the friend of a wonderful company, and enemy of the mediocre". I will not buy such a stock, because there are so many other wonderful businesses out there.
Summary
I didn't purchase Arcotech for a simple reason: it has no competitive advantage. It might have grown fast, but there are limits in the industry with extremely narrow margins. As Warren Buffett said: "Time is the friend of a wonderful company, and enemy of the mediocre". I will not buy such a stock, because there are so many other wonderful businesses out there.
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