Friday, January 14, 2011

Whose money is it anyway?

There is a category of companies in the market in which a very peculiar situation is being played out. Just take a look at this;


Now, what is common in these totally diverse companies? All of their names end in "Ltd"? Umm, yup, but there is another thing common; all these companies have sold their businesses (assets only) and received cash (bigtime!) for the sale. It is a very convenient way for transferring ownership to others (read firangs) bypassing the pain of open offers/delisting etc etc.

The critical question is, why is the market not valuing these companies at least at the net cash on books? Why are these companies getting pathetically valued? And have the actions by these companies generated wealth/benefited the minority shareholders in any way?

Well, the answer is NO! Shareholders have rarely earned in all these situations. The primary reasons for this are:

  1. Very little transparency: Rarely do the promoters/management of these companies share what exactly they intend to do with the money that the company receives. Which business will they put it into? Do they have expertise in any new business/venture? No-one really knows.
  2. Getting into unrelated business: e.g. Laffans, which was a chemical company announced that they will not payout any money to the shareholders, and instead will utilise that money to get into logistics business!
  3. Not sharing much money with the shareholders: In some of these cases, the companies do not payout anything as dividend to the shareholders. In some cases, the companies initiate a buyback. But in most, they retain most of the money in the company. Again, what will they do with it??
  4. The 'gall bladder effect': When the gall bladder is full of liquids, one pisses it off. Similarly, when there is too much cash in the company, there is a high probability that promoters may piss it off!! :-) The money may be pilfered or spent on absolutely worthless stuff without any benefit to the minority shareholders.
To cite an example, let us take a look at Gwalior Chemicals (Geecee Ventures)...

The facts:
  • In June 09, Gwalior was trading at about Rs.100, with a market cap of about Rs.250 cr. Debt on books was Rs.150 cr. (Today, its CMP is Rs.51, with a market cap of Rs.105 cr.)
  • At that time, the company announced the sale of their entire operating business to Lanxess for Rs.536 cr. From the proceeds, they retired debt of Rs.156 cr and were left with about Rs.380 cr.
What they had said:
  • The management had announced that the company will return Rs.100 cr out of this money to the shareholders through dividend and/or buyback.
  • The management had also announced in the media that the company will invest the remaining money in specialty chemicals and power generation businesses.
And what they actually did:
  • The company did not pay any dividend. They, however utilised Rs.50 cr for buyback, in which the promoters also participated.
  • There is no word about any specialty chemicals/power business. IN FACT, the company recently amended its 'objects clause' in the Memorandum of Association and has now become an NBFC!!!!! So all this money will now not go into an operating business, but will be invested!! Where?? Who has the qualification and experience to handle such a large amount of money? No-one really knows. :-( Maybe the promoters have realised that being an 'investor' in others' business can be more profitable than doing business themselves. Hell, if all promoters start thinking and doing that, what will you and me do???!!! :-D

So whose money is it anyway?? The company's? The shareholders'? Or just the promoters'? Hmm...

What one should learn from the same is that, given this experience, the market will be very wary of such situations and will not accord them proper valuations. Therefore, before jumping into any such opportunity, one should surely think twice (minimum). These can very well end up being 'value traps'. (Recently, Riddhi Siddhi Gluco Biols has announced something similar. Let us see how that goes!)

Cheers and happy investing!

P.S. I am not at all saying that all companies have been unfair to shareholders. e.g. Piramal Healthcare has taken some good steps and have been transparent to some extent. All I am saying is one should be careful in such situations and not rush to invest, sensing value in the situation. 

17 comments:

Neeraj Marathe said...

Hi,
I have made a grave error in calculation in the case of Piramal Healthcare.. (very stupid of me..)
the cash on books should be around 15000 cr and not 20000 cr...
Thnx to EXCEL MONKEY for pointing it out..
cheers!
Neeraj

Raja said...

Nice topic. Was keeping track of the Piramal story for sometime now. Always has the same doubt in mind. I know they have the cash but how do i know that's going to be used for shareholders good.
This post put things in perspective.

Regards
Raja

excel_monkey said...

Interesting study

A lot would depend on promoters intent in sharing with the minority and the allocation of this cash

I think most of it would be siphoned off or destroyed

Regards,
Excel

Neeraj Marathe said...

Yes Raja,
The promoters/mgmt and their intentions are very important.
Cheers!
Neeraj

Neeraj Marathe said...

Yes Excel,
I agree..
Cheers!
Neeraj

RAYHAAN said...

u sure took the fun out of ncav cigar butt investing
sort of have a similar situation of stock selling below cash
IN TEESTA AGRO
wot r ur views?

Neeraj Marathe said...

lol...sorry to be a party pooper Rayhaan...but these are just my views..they may not necessarily be right!
Regarding Teesta, i have never looked at it, but a cursory glance at the balance sheet shows 21 cr of cash and 17 cr of debt against a mkt cap of 6 cr..so dsnt fit the bill really..
cheers!
Neeraj

rayhaan said...

i believe there might have been a mistake....i think its got a fixed deposit of 20 crore app according to the latest annual report.
anyways even then it sure looks like its selling cheap
140 crores of sale
9 crores of cash profit(carried forward from yester years)
20 crore fd
wot r ur thoughts?

Neeraj Marathe said...

Umm which company Rayhaan?

jagadish said...

Hi Neeraj-thank you very much for such an informative blog. I request your views on following stock. They may fit your value and spl sit bill.
1)Innovative tech pack-PET bottles and jars manufacturer(supplies to FMCG clients). Recently emerged from BIFR.Reorganized share capital is 2.2mn shares, at current mkt price of 57.3 Mcap is 12cr. all legacy debt is repaid under restructuring scheme. co generated sales of 33cr and EBITDA of 5cr for FY10.
2)Birla precision tools: Zenith birla's tool biz is recently merged with this co. cos size and profitability grew significantly with this merger. though mcap is not reflecting the same. Mcap on diluted equity base is 40cr and net debt as of Sep'10 was 7cr.For H1-11 co generated sales of 50cr and EBITDA of 5.7cr.
3)Kriti industries- recently demegred low margin soya oil biz. demerger resulted in improvement of core biz (PVC pipes and automobile plastics) profitability. co is trading at 3x trailing EBITDA.
4)PTL LTD- this stock plunged to rs 25 levels form rs 50 levels. co has 40 rental annuity income and a 220 bed multi specialty hospital in delhi. plans for additional 230 beds is underway. 40 cr rental comes from a tyre manf factory leased out to apollo tyres. this factory is built on 30 acre prime land in kochi, kerela.co has plans to develop this prime land and move factory to a different location and. cos Mcap is 165crs with net debt of 157cr. hospital biz is cash break even and debt repayment started in sep10.

Neeraj Marathe said...

Hi Jagdish,
Very interesting situations there..Can i get back to u on those, after reading a bit bout them?
Can i have ur email id if u dont mind?
Cheers!
Neeraj

jassi said...

Dear Neeraj,
I visited your blog. The stocks covered are indeed very interesting. I had chosen two stocka Gujarat Reclaim and Rubber and Gandhi Special Tubes...what is your take on them.

Regards,
Jaslene

Neeraj Marathe said...

Hi Jassi,
I am tracking Gujarat Reclaim, but have not taken any position yet..am yet to understand how sustainable is their competitive advantage.
Gandhi Tubes i have not looked at in depth, so cant comment..
Both stocks look to be very cheap for sure..
Cheers!
Neeraj

Jigam Gandhi said...

Nice Blog, I would draw your attention to one more company " Bombay Oxygen", Their cash in hand is twice its stock price. They got the money be selling the property. Stock price is around 7000/- and after the sale, they declared a special dividen of Rs 20/-.

Neeraj Marathe said...

Hi Jigam,
Thnx for the update..i have not seen Bombay Oxygen as yet..(shudnt it be renamed Mumbai Oxygen? sorry, bad joke) :-)
Cheers!
Neeraj

Dayanand Deshpande said...

if you had invested large amount in Geecee at 90; what would you do at CMP @ 45??

Neeraj Marathe said...

Hello Dnyanesh,
We all have our own comfort levels and mindsets..
Since u r asking wat i wud do, i will just sell it off..
cheers!
Neeraj