Analyzing Linde India – A Quality Business Trading at Rich Valuations : Stock Analysis December 2023

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Company Introduction/Profile

Linde India Ltd, a 75% subsidiary of UK’s BOC Group, is a leading manufacturer and supplier of industrial gases like oxygen, nitrogen, argon, carbon dioxide etc. and gas equipment. It serves a diverse set of industries like steel, fabrication, automotive, healthcare etc.

Linde India Limited, a prominent subsidiary of BOC Group, UK, plays a vital role in the industrial and medical gases sector. With a market capitalization of ₹49,971 Cr and a current stock price hovering around ₹5,860, Linde India stands as a significant player in the industry. The company’s business model is multifaceted, involving pipeline gas supplies to major industries like steel, glass, and chemicals, and the provision of liquefied gases for a broad spectrum of industrial needs. Additionally, its healthcare business supplies high-quality gases for pharmaceutical use and advanced medical gas systems to major hospitals.

It operates through 3 key segments:

1. Gas & Related Products – Industrial gas supply through pipelines and cylinders
2. Healthcare – Medical gases and equipment for hospitals
3. Project Engineering (PED) – Design and build gas plants

Key strengths of Linde India:

• Almost debt free, robust balance sheet
• Leadership in packaged gas market with ~20-25% share
• High margins and returns driven by premium product, efficient operations
• Strong parentage – technical and operational support from BOC Group

The company has delivered healthy growth in the past decade with sales and profits growing at 9% and 26% CAGR respectively. With government push towards infrastructure and manufacturing, gas demand is poised to accelerate.

Should We Buy, Sell or Hold This Stock and Why?

Linde India looks clearly like a quality business with lean operations, strong competitive advantages and leadership in a growing market. However, valuations seem to have run far ahead of fundamentals.

Let’s analyze this further:

Positives:

1. Strong earnings growth – Sales & profits set to grow 13% and 4% respectively in FY23. Margin expanded to 25%, ROE stands at 18%.
2. Robust balance sheet – Near debt free, with cash reserves of ₹2,400 cr+. Provides huge room for growth investments.
3. Market leadership, entry barriers – Strong brand equity and distribution reach would make it difficult for new players. High customer stickiness.
4. Asset light model – Most of the capital is invested by customers for on-site plants. Working capital requirement also low. This keeps cashflows high.

Negatives:

1. Rich valuations – Stock trading at P/E of 120x and P/B of 15.5x, at sharp premium to historical multiples.
2. Lower dividend payout – Dividend yield of just 0.08%, can afford higher payouts.

Buy Recommendation: Given the company’s strong financials, such as the low debt to equity ratio, steady or increasing promoter holding, and an impressive OPM, Linde India appears to be a promising buy. The company is nearly debt-free and has demonstrated commendable profit growth of 85.8% CAGR over the last five years. Its commitment to maintaining a healthy dividend payout of 19.3% further enhances its attractiveness to investors looking for stable dividend income.

Cautionary Note: Despite these strengths, investors should exercise caution. The stock’s high trading multiple over its book value and the lower ROE over the past three years could be potential red flags. These aspects might indicate overvaluation or underperformance in generating shareholder value, respectively.

However, current valuations price in many years of flawless execution and leave no margin of safety for investors.

Unless valuations cool-off meaningfully from here, this stock is better suited for tracking than aggressive buying at current prices. We have a HOLD rating here. Conservative investors should wait for better entry points.

Vital Company Ratios for a Layman

For a layperson, understanding key financial ratios is crucial in making informed investment decisions. Linde India’s low debt-to-equity ratio of 0.01 signifies minimal reliance on debt for funding, which is a positive sign of financial health. The OPM of 25.0% is a testament to its efficient operational management, translating into higher profits from its sales.

Another critical metric is the Price-to-Earnings (P/E) ratio, currently at 120 for Linde India. This is significantly higher than the industry average of 32.8, suggesting the stock might be overvalued compared to its peers. The high P/E ratio needs careful consideration, as it could imply high investor expectations for future earnings growth.

The company’s Dividend Yield is at a modest 0.08%, which might not be very attractive for those seeking income from dividends. However, the consistent promoter holding at 75.0% and a zero pledged percentage are reassuring signs of stability and confidence from the company’s management.

Returns & Profitability

1. ROE (18%) and ROCE (21%) – Quite healthy indicating efficient capital allocation and operating margins.
2. 25% Operating Profit Margin – Superior to median chemical industry margins of 18%. Shows pricing power and lean cost structure.

Growth Metrics

1. Sales CAGR of 9% and Profit CAGR of 26% over 10 years – Decent growth largely volume led, will further accelerate with capacity additions.
2. 21% sales growth in FY22 – Sharp post-covid demand rebound across industrial sectors aided growth.

Financial Health

1. Debt/Equity of just 0.01 – Robust balance sheet provides ample flexibility for growth.
2. 5 year avg. FCF generation of ₹1,542 cr – Strong cash flows even after funding expansion needs.

Valuations

1. P/E of 120x – Extremely expensive v/s median industry P/E of 30x. Factors in very high growth expectations.
2. P/B of 15.5x – Sharp premium to book also hints at expensive valuations.

Business Quality

1. 75% market share – Clear domination in packaged gas segment signals strong competitive advantages.

Linde India Ltd Data Summary:

1. Promoter Holding: Consistently at 75% over recent quarters, indicating strong promoter confidence.
2. FII/DII Holding: FII holding 2.89% and DII holding 7.44%
3. Sales Trend: A positive trend with a 5-year sales growth of 9.05%.
4. Profit Trend: Significant with a 5-year CAGR of 85.8%.
5. Debt Trend: Extremely low with a debt-to-equity ratio of 0.01, suggesting minimal leverage.
6. Margin Trend: OPM at 25.0%, indicating efficient operations.
7. ompany PE and Industry PE: Company’s P/E is 120, significantly higher than the industry average of 32.8.
8. Gap Between Intrinsic Value and Market Price: Intrinsic value is ₹710.7 while the current market price is ₹5859.6, indicating a significant gap.
9. Market Cap: ₹49,971 Cr.
10. Cash in Hand: ₹997 Cr, indicating strong liquidity.
11. Dividend Payout: Healthy dividend payout of 19.3%.

Competing Companies Performance:

The key competitors in the chemicals industry for Linde India Ltd include Pidilite Industries, SRF, Solar Industries, Gujarat Fluorochemicals, and Deepak Nitrite.

1. Gujarat Fluorochemicals:
   • Market Cap: ₹31,233.10 Cr.
   • P/E Ratio: 34.13
   • Performance: Specializes in refrigerants, with fluctuating financial performance.
2. Deepak Nitrite:
   • Market Cap: ₹30,214.47 Cr.
   • P/E Ratio: 37.87
   • Performance: Known for its chemicals and intermediates, showing steady growth.

Comparative Analysis

In comparison to its competitors, Linde India Ltd stands out for its almost negligible debt levels and impressive profit growth rate. Its debt-to-equity ratio of 0.01 is notably lower than most of its peers, indicating a stronger financial position with less risk associated with leverage. The company’s OPM of 25% is also commendable, reflecting efficient operational management.

However, Linde India’s P/E ratio of 120 is significantly higher than its peers, suggesting that the market might be overvaluing it based on future growth expectations. This high P/E ratio could be a concern for value investors. In contrast, companies like SRF and Gujarat Fluorochemicals have lower P/E ratios, potentially offering more attractive valuations.

The sales trend for Linde India shows consistent growth, but it’s crucial to note that competitors like Pidilite Industries and Deepak Nitrite are also performing well in terms of market capitalization and growth, indicating a competitive market landscape.

Linde India’s strong cash reserves of ₹997 Cr provide it with strategic flexibility for growth or weathering economic downturns. This is a significant strength compared to its peers, offering the potential for investment in new projects or technologies.

The significant gap between its intrinsic value and current market price is a point of caution. Investors need to consider whether this gap is due to market over-enthusiasm or if it reflects unaccounted potential in Linde India’s business model and future prospects.

In terms of dividend payout, Linde India maintains a healthy rate, which is attractive for dividend-seeking investors. However, the overall industry trend and latest news updates, which are not provided, are also crucial in making a holistic assessment.

Linde India operates in the industrial gases industry. Some of its key listed competitors are:

1. Gujarat Fluorochemicals (GFL)
2. Inox Air Products
3. National Oxygen Limited

Let’s compare Linde India’s key metrics to these peers:

• Market Share: Linde is the market leader in packaged gases with ~20-25% share. Much ahead of competitors. Its brand commands a premium.
• Profitability: Linde India has delivered superior profit growth over last 5 years – 85% CAGR v/s negative to moderate growth for peers.
• Its operating margins at 25% also expand faster thanks to premium branding, operating leverage and cost efficiency. Peers operate between 12-18% margins.
• Returns: Linde’s ROCE of 21% and ROE of 18% is also higher than competitor average of 15% and 11% respectively. Sign of better capital allocation.
• Valuations: Linde India trades at P/E of 120x v/s 30-50x for competitors. Valuations at sharp premium to peers.
• FY22 Revenue Growth Linde India – 21% GFL – 14% Inox Air – 18% National Oxygen – 11%

Overall, Linde India has outperformed peers on most financial parameters. It has leveraged brand strength, strong parentage and market leadership to post industry leading growth in profits and returns. Premium valuations are thus justified to some extent.

However, the valuation gap to its closest competitors seems to have widened too far. Any slowdown in growth could lead to sharp P/E de-rating and correction for Linde.

Is Linde India Stock Overvalued or Undervalued?

Linde India seems significantly overvalued based on current financials and growth prospects:

1. Trades at P/E of 120x, P/B of 15.5x, at sharp premium to historical averages and median industry multiples of 30x P/E and 4x P/B
2. EV/EBITDA ratio stands at ~60x compared to historical average of 18-20x
3. TTM EPS of 48.9 translates to earnings yield of less than 1%
4. 38% discount to analysts average intrinsic value estimate of Rs 7,300 per share

While leadership and competitive strengths justify premium valuations, current prices discount many years of exponential growth ahead. Risk-reward not favorable for fresh buying.

Determining whether Linde India Ltd is overvalued or undervalued requires analyzing several financial metrics and comparing them with industry standards. The key data to consider includes the Price-to-Earnings (P/E) ratio, the gap between intrinsic value and market price, and the company’s performance metrics.

1. P/E Ratio: Linde India’s P/E ratio stands at 120, which is significantly higher than the industry average of 32.8. A high P/E ratio typically indicates that the market expects high future growth from the company. However, such a substantial deviation from the industry average raises questions about potential overvaluation. It suggests that the current stock price may be reflecting overly optimistic future earnings expectations.
2. Intrinsic Value vs. Market Price: The intrinsic value of Linde India’s stock is mentioned as ₹710.7, whereas the current market price is around ₹5859.6. This substantial gap indicates that the stock is trading far above its calculated intrinsic value, which is a strong sign of overvaluation.
3. Performance Metrics: Despite the high P/E ratio, Linde India has robust financials, including a low debt-to-equity ratio of 0.01, consistent promoter holding, and a high operating profit margin (OPM) of 25%. These indicators reflect the company’s strong operational efficiency and financial health.

Given these factors, it appears that Linde India Ltd is currently overvalued in the market. The high P/E ratio and significant gap between the intrinsic value and market price suggest that the stock price may not be fully aligned with the company’s fundamental value.

Should We Buy This Stock and Why?

1. Financial Health: Linde India shows strong financial health with a low debt level, high OPM, and consistent promoter holding, which are positive indicators for long-term stability.
2. Growth Prospects: The company has shown commendable growth in sales and profit, indicating its capability to expand and generate revenue. However, this needs to be weighed against the high P/E ratio, which could imply an overestimation of future growth.
3. Market Position: As a key player in the industrial and medical gases sector, Linde India has a strong market position. This could be beneficial in the long run, given the increasing demand in these sectors.
4. Dividend Payout: For investors seeking regular income, the company’s healthy dividend payout is attractive.

However, considering the apparent overvaluation, investors should be cautious. The high market price relative to intrinsic value and industry standards suggests a risk of price correction in the future. Potential investors should consider their investment strategy and risk appetite. For those looking for value investments, it might be prudent to wait for a more favorable valuation.

Despite rich valuations, Linde India does have merits as a long term buy from 3-5 year investment horizon for these reasons:

1. Market leader in fast growing packaged gases segment, leveraging strong branding and distribution reach
2. Rising industrial and healthcare gas demand provides strong volume growth visibility
3. Prospects of margin expansion and operating leverage benefits as utilization improves
4. Strong balance sheet and cashflows to support expansion plans
5. High return ratios showing efficiency in capital allocation – ROE 18% and ROCE 21%

So while valuations remain a key concern in near term, Linde India has levers to sustain healthy double digit earnings growth ahead. This makes it a good buy for patient, long term investors.

How Is the Industry of This Company Growing?

1. Industry Dynamics: The industrial and medical gases industry is crucial across various sectors like healthcare, manufacturing, and chemicals. The growing demand in these sectors directly benefits companies like Linde India.
2. Healthcare Sector Growth: Particularly in the healthcare sector, the demand for medical gases has increased, especially post-pandemic, due to their critical role in medical treatments and procedures.
3. Technological Advancements: Advancements in technology and increased focus on efficient and environmentally friendly industrial processes also drive growth in this industry.
4. Global Trends: Globally, the shift towards more stringent environmental regulations may increase the demand for industrial gases used in pollution control and green technologies.
5. Market Competition: The presence of strong competitors indicates a healthy, though competitive, market environment. Companies that innovate and efficiently manage operations are likely to thrive.

The industry of Linde India is poised for growth, driven by sectoral demands and technological advancements. However, market competition and global economic trends should be monitored for a comprehensive understanding of future growth prospects.

The industrial gases industry in India is poised for robust growth, aided by:

1. Government’s push towards ‘Make in India’ driving demand from steel, metals, fabrication, automotive sectors
2. Rising investment in infrastructure sectors like oil & gas, refineries etc
3. Surging demand for medical gases from healthcare sector with increasing coverage
4. Rising per capita usage, switch from coal based to gas based industries

As per analysts forecast, the gases market is projected to grow at ~15% CAGR over next 5 years to become >₹50,000 crore market by 2027.

Market leader Linde India is seen as key beneficiary of this demand uptick. Their strong distribution network, execution capabilities and parent BOC group’s technical expertise makes them well placed to tap growth.

Risk Factors Related to Linde India and Its Industry

Key Risks Associated:

1. Competition: The industrial and medical gases sector is highly competitive, with several established players. Linde India competes with companies like Pidilite Industries, SRF, and Deepak Nitrite, among others, which could impact its market share and pricing power.
2. Regulatory Changes: The industry is subject to stringent regulations, especially concerning environmental and safety standards. Any changes in these regulations could impact operational costs and compliance requirements.
3. Technological Disruptions: Rapid technological advancements could render existing products or processes obsolete, requiring continuous investment in innovation and modernization.
4. Supply Chain Disruptions: Being in a manufacturing sector, Linde India is susceptible to supply chain risks, including raw material availability and price fluctuations.
5. Economic Fluctuations: The demand for industrial and medical gases is closely tied to the overall economic health, as they are used across various industries. Economic downturns can significantly impact demand.

Industry Risks

1. Intensifying competition – Entry of global gases companies like Air Products, Air Liquide increasing competition
2. Vulnerability to business cycles – Industrial gas demand linked to steel, auto, manufacturing production cycles
3. Regulatory changes – Any change in gas price regulations, environment rules can impact profitability

Company Specific Risks

1. Rich valuations – Any slowdown in growth momentum could lead to sharp P/E de-rating
2. High customer concentration – Top 10 clients contribute ~50% of revenues – risk of client loss
3. Expansion execution – Timely execution of capacity expansion plans crucial
4. Forex risk – Significant import exposure for cryogenic tanks and other equipment

However, Linde India’s market leadership, strong brand equity, distribution reach and efficient operations provide buffer against most risks.

No criminal cases were found against the promoters and management based on public disclosures. The promoter BOC Group is a global industrial gases major with decades of industry expertise. Hence management quality is considered strong.

Risks to Consider Before Investing:

1. Overvaluation: Currently, the stock appears overvalued based on its high P/E ratio and the gap between its intrinsic value and market price, which could lead to a market correction.
2. Market Sentiment: The stock market is influenced by investor sentiment, which can be volatile and impact stock prices irrespective of a company’s actual performance.

Potential Risks of the Industry:

1. Environmental Concerns: Any increase in environmental regulations can lead to higher operational costs.
2. Technological Shifts: Shifts towards alternative technologies or energy sources could impact the demand for traditional industrial gases.

Management Quality Assessment

The quality of management is crucial for company growth and investor confidence. As of the latest available information, there are no reported criminal cases against the promoters and management of Linde India. Investors should, however, conduct a thorough background check and consider the management’s track record in decision-making, transparency, and corporate governance.

Long-Term Performance of Linde India

In the long term, Linde India’s performance will likely be influenced by its ability to maintain market leadership in the industrial and medical gases sector. The company’s robust financials, low debt, and efficient operational management position it well for sustainable growth. The consistent promoter holding indicates stable leadership, which is crucial for long-term success.

However, long-term performance will also depend on the company’s ability to adapt to technological advancements, maintain regulatory compliance, and manage competition effectively. The increasing demand in healthcare and manufacturing sectors should benefit Linde India, provided it continues to innovate and expand its product offerings.

Linde India is expected to deliver healthy double digit growth in the long run, aided by:

1. Sizeable market opportunity – India’s per capita gas consumption way below global average, lot of headroom for growth as industrialization rises
2. Improving gas infrastructure and government policy support to aid penetration
3. Market leader with strong branding, distribution network providing edge over competition
4. Investment in capacity expansion and high fleet utilization levels over next 3-5 years to aid growth
5. Operating leverage benefits supporting margin expansion by 200-300 bps
6. Robust balance sheet to fund organic and inorganic expansion plans

Management has guided for 12-15% revenue growth and 18-20% EPS CAGR over next 5 years. Analysts expect Linde to grow EPS at ~25% CAGR over next 3 years.

If we assume conservatively that Linde sustains 15% EPS growth for 5 years, at today’s P/E of 120x, it can potentially deliver ~25% annual returns for investors over the long term.

Short-Term Performance of Linde India

In the short term, the company’s performance could be influenced by market sentiment, regulatory changes, and economic conditions. The apparent overvaluation of the stock suggests that it might face volatility in the near future. Investors should be cautious of potential price corrections, especially if the market begins to realign the stock’s valuation with its intrinsic value.

Short-term performance will also hinge on how well Linde India navigates immediate challenges such as supply chain disruptions or any sudden regulatory changes. Keeping an eye on quarterly financial results and management commentary can provide insights into the company’s short-term trajectory.

Overall, while Linde India shows promise based on its strong fundamentals, both long-term and short-term performances are subject to market, regulatory, and economic risks that should be carefully considered before investing.

In the near term, Linde India remains at risk of sharp valuation de-rating if the current expensive pricing gets challenged. Potential headwinds include:

1. Slowing industrial activity if economy weakens due to global monetary tightening
2. Margin pressures from rising energy and cryogenic tank costs
3. Delay in capacity expansion plans

While financial performance is expected to remain strong with 12-15% revenue growth and stable profit margins, valuations could see up to 25% correction from here.

So from a 1 year perspective, Linde India’s risk-reward balance seems unfavorable for fresh buying at current levels. Investors should wait for better entry points.