A stock worth salting away

A foods and hospitality play at a deep discount to its net asset value. That is my case for Saboo Sodium Chloro, a low-profile Jaipur-based company that is likely to post fatter cheques to shareholders. Prime facie, this is what most shareholders will find:

• Saboo Sodium is engaged in the production of table salt; the company is also engaged in a hotel project in Jaisalmer and a ropeway-cum-property development project in Jaipur

• Margins in the company’s table salt business have risen in the last four sequential quarters: -36% to 34% to 38% to 44% even as the business is still scaling in the conventional sense (top line of Rs 2.5 crore in the October-December quarter of 2007)

• The company reported a post-tax profit of Rs 2.75 crore in the first three quarters of 2007-8 with a particularly weak third quarter (profit after tax, PAT, Rs 94 lakh)

I intend to track this stock for the following reasons:

• The salt business requires a challenging act between visibility, distribution and capex; overdo one and you are history. Saboo Sodium has a fair record; its Surya and Tota brands are the No. 2 (behind Tata Salt) in most of north India and a leader in Rajasthan.

• The salt throughput will rise significantly in the next 12 months following investments in the Nawa factory (3 lakh tonne per annum) and greenfield outlays in Gandhinagar and Tuticorin (2.5 lakh tonne per annum each)

• The company is playing an interesting incubatory role, growing its hotel and realty development projects out of accruals with a view to enriching corporate value

So what are these hotel and realty development plays?

a) The acquisition of 75 acre in Jaisalmer to build a 300-room hotel. Project cost Rs 15 crore.

b) The commissioning of a build-operate-transfer (BOT) ropeway between Jal Mahal and Amerkot in Jaipur with the incentive of leveraging associated real estate development, advertising spots and retail (in collaboration with a ropeways partner, Saboo Sodium holding 75% stake in a joint venture company). Project cost Rs 30 crore.

A couple of immediate questions: is this a probable overextension considering that profit for the first nine months was but a fraction? Does the management possess the managerial bandwidth to execute?

The management is optimistic of a PAT of Rs 4.5 crore for 2007-8 and twice this number in 2008-9. This cash flow will hypothetically be adequate to fund the staggered requirements of the salt expansion and the other two projects.

Two big numbers to chew on: the prospect of overall revenues of around Rs 90 crore in 2009-10 at uncompromised margins across all three businesses and the leased Jaipur property (60 years) alone being valued at Rs 250 crore.

Compare with a market capitalisaton of less than Rs 35 crore (based on fully diluted equity). Spot the opportunity?

Disclosure: The writer holds stocks in Saboo Sodium Chloro

Mudar Patherya heads Trisys, an annual reports consultancy. His column identifies stocks that are not in the limelight. Reach him at mudar@trisyscom.com