Dai-ichi Karkaria - A value investor's delight?

The reason why I am calling it a 'value investor's delight' is as follows:

* The debt of Rs.1 cr is a deferred sales tax loan.
* Additionally, Dai-ichi holds 8100 shares of Bank of India (market value Rs.37 lakhs) and 57000 shares of Clariant Chemicals (market value Rs.4 cr).


At present market cap, the company is quoting just at its cash and cash equivalents. Plus, there are additional investments in shares, as detailed above. The operating business is available free! Indeed, a value investor's delight.
Sounds good? Well lets get some more dope on it...

• The company has some real estate asset on which it receives yearly lease rent of Rs.1.5 cr. This asset (which could be a property in some posh area) would be very valuable. No details of the same are available. But this value provides some more MOS to the buyer of the business.
• The business of the company is cash flow positive and has been generating cash from operating activity.
• In April 2010, the company completed buyback of 1.55 lakh shares at an average price of Rs.35.74 per share. (Equity pre-buyback was 76 lakh shares)

So the next logical thing to do would be to see performance of the operating business:

• Dai-ichi is essentially a specialty chemicals company. More details of the products can be obtained here.
• The company has 2 subsidiaries, Basic Oil Treating India Ltd (no longer a subsidiary) and Dai-ichi Gosei Chemicals India Ltd.
• The operating performance of the company for the past few years has not been very encouraging, as follows:

• As can be seen, over the last 5 years, the operating business of the company has not gone anywhere in terms of topline growth. 
• However, a slow change is seen in the efficiency of operations, with the business becoming profitable at the operating level. This is a positive sign.
• The company has recently entered into an agreement with CTI Chemical Asia Pacific, a subsidiary of a US specialty chemicals MNC. Due to this agreement, Basic Oil Treating India Ltd, which was Dai-ichi's wholly owned subsidiary will become a 50-50 joint venture of with CTI. Details of the agreement can be found here. Essentially, this deal values Dai-ichi's stake in the JV at Rs.3.7 cr.

So should one buy shares of Dai-Ichi? I, for one, would not be buying the shares for the following reasons:

• Though this is a great opportunity for someone who wants to buy the entire business, its not so for a small minority shareholder. I, being in the later camp wont be buying.
• The company is not strong on the operating front. Some cases launched against it by clients like ONGC don't speak too well about the core business.
• Financially too, the operating business is not making money. The company's profitability has sustained only due to the income it receives on its investments.
• The cash, which is presently on the books, has come on the balance sheet just last year. Now, whether it will stay there is a big question. Typically, in small companies like these, cash moves around as per the wishes of the promoters! So, I wouldn't want to take that risk.

In short, value exists, but VALUE IS VALUABLE, ONLY IF ITS VALUE CAN BE PROPERLY VALUED!!!

In case of Dai-Ichi, the value might not be valued! I would prefer to stay away from it.

Cheers and happy investing!!