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Company Profile – Tinplate Co of India

The Tinplate Company of India (NSE:TINPLATE) is a classic Warren Buffet style value stock. The company has a 60% market share of the prime tinplate market and 40% overall domestic market share in India. Warren Buffet likes economic moats – Tinplate’s got a wide moat. The company has been profitable for 20 years and sports a PE ratio of 9.1. The stock hit an all-time high of Rs. 442.9 in April and is now trading at ~320.

The typical financial metrics investors look at also seem fine at first glance.

The long-term production growth profile also indicates this is not a shrinking business which deserves a low PE multiple. The company is running its current 379,000 tonnes per annum plant at full capacity and is planning to invest Rs. 2254 crores (Rs. 22.54 billion) to raise capacity by an additional 300,000 tpa.

That huge increase in revenue and EPS caught my attention. What caused it? Higher realization and higher sales volume. That’s it. No further details given. No, I’m not kidding.

From the FY 2021-22 Annual Report:

“The Company recorded its best ever operational performance for the year under review. The Company reached highest ever gross production of 380KT and net production of 373.5KT (vs 291KT in FY 2020-21), your Company also achieved highest ever sales of 373.5KT, which is 18% higher than previous year (315.5KT). The Company’s EBITDA (Earnings before interest, taxes, depreciation and amortization) for FY 2021-22 is ₹ 54,019 lakh as compared to ₹ 20,133 lakh in FY 2020-21 mainly due to higher realization and higher sales volume. Consequently, profit after tax increased to ₹ 35,291 lakh in FY 2021- 22 from ₹ 9,815 lakh in FY 2020-21.

Replicating the success of FY 2020-21 the Company focused on Exports to load the mills evenly across quarters. Exports at 92KT in FY 2021-22 was the ever highest for your company. The Company exported 24% of its produce to Middle East, Europe, parts of Africa, South East Asia (SEA) and neighboring countries despite the shortage of containers, vessels, high freight rates and need for special banking arrangements.

Your Company’s domestic sales increased by 14% to 281 KT over previous year (246 KT) owing to better demand as impact of pandemic reduced across quarters. Thus, despite ongoing pandemic your company’s overall sales of 373.5 KT was ever highest in its history.”

If you’re looking for more information on the underlined bits, you would be out of luck since the annual report doesn’t elaborate on these important matters. Will the high revenues and earnings sustain? What factors should one look for to assess that? What inputs to use to run a sensitivity analysis? No data available.

Ok, so I can’t analyse the stock from that angle. Switching tacks, let’s try to understand what the company does.

The company takes hot rolled coiled (HRC) steel, coats it on both sides with tin, and sells the finished product to customers for packaging food, edible oils, aerosols, paint, battery components, etc. All the stuff that typically comes in a can.

HRC steel accounts for 70-75% of total input cost, while tin accounts for 8-10%. Here’s the kicker. The steel is sourced from Tata Steel (NSE:TATASTEEL)… which also happens to own 74.96% of the company’s shares.

While it is common for suppliers to take equity stakes in customers as a way of financing new manufacturing facilities and locking in long-term orders, it is quite uncommon for a listed entity to own three-fourths of another listed entity, while being the prime supplier of a critical raw material. The ownership stake and Tinplate’s location (3 km from supplier’s plant) practically guarantee that the related-party transactions bear no resemblance to arms-length transactions.

Such a stock listing can happen only in India, where corporate governance standards are not at the same level as the US.

By law, the Board of Directors of a company have a fiduciary responsibility to act on behalf of shareholders. But when one shareholder dominates and holds the fate of the company in balance by also being the sole supplier of a critical raw material, it is fair to assume that the interests of minority shareholders won’t adequately matter when it comes to strategic financial decisions.

Quite apart from the governance red flag, that high share ownership indicates lack of free float, which makes it dangerous for funds to take meaningful stakes. Whatever a fund manager thinks the ‘intrinsic value’ is, that number has to be discounted for the added liquidity risk.

Don’t be fooled by the valuation metrics and appearance of growth or profitability. Cheap stocks are cheap for a reason. Moreso given that this is an Indian company that’s trading at a cheap valuation while the benchmark Sensex index is near all-time highs.

If you’re a tin bull looking to play the mean reversion trade, consider Alphamin Resources (TSXV:AFM) instead.

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