Mahindra Composites Ltd - AGM

Hello again! In the last post, I had wished you all a happy AGM season! Me and my colleague attend lotsa AGMs.. Lets just discuss a bit about what happened recently at an AGM I attended. A fair warning; this post does not contain any buy/sell advise or does not offer any opportunity for the reader to earn money. For what its worth, it will be useless for a majority of readers! :-D


Ok..just a bit of basics first..

• A company is owned by its equity shareholders, who appoint a group of people to manage the company on their behalf (Board of Directors)
• Once a year, these managers meet the owners to discuss what all they did and what all they intend to do going forward (AGM)
• Usually, the Board of Directors and the management of the company treat the shareholders with professional courtesy and at least a bit of respect.

Now lemme just tell you people what happened at the recently held AGM of a company called Mahindra Composites Ltd, which is part of the Mahindra Group.

A couple of days before the AGM, a Mumbai based analyst friend of mine called up the CS of the company. The problem was that he had bought the shares a bit late, so he was not a shareholder of the company as on the applicable record date. My friend enquired whether he would still be allowed to attend the AGM. Now usually, companies do allow such analyst-shareholders to attend the AGM (although, legally, they can surely disallow). In some cases, the company people politely refuse, saying that as per law, such request cannot be entertained. However, the reply of the CS of Mahindra Composites to my friend was "kya re, mere baap ka company hai kya? I said no..Dont ask again!!" Thats one hell of a rowdy CS, we thought!  :-D

So my friend (very wisely) decided not to come all the way to Pune, from Mumbai to attend the AGM. I, on the other hand (not very wisely), went ahead for the AGM. And it turned out to be one of the most pathetic AGMs I ever attended. Here is what happened...

• Myself and one more person who came late, were the only non-employee shareholders at the AGM. All other shareholders present were employees, wearing the company's uniform.
• Mr.K (lets call him so), the CFO, came across as an extremely rude and arrogant person, who does not display a ounce of professionalism, taking shareholders fully for granted. Upon seeing my questions which i provided in printout form, his response was "these questions have nothing to do with the AGM of the company, hence they will not be answered". (Although the questions were related to the company's performance and its plans in the near future.. Discussing all this is actually what the AGMs are held for!!) During the AGM too, i asked one question, but was asked to sit down by the CFO and was not allowed to ask questions to the CEO. After being polite for a while, i had to raise my voice (something which I never ever do anywhere!). After about 5 mins of heated arguments, he said that most of the questions are forward looking, and will not be answered by them since 'SEBI does not permit them'. :-) Creating a bigger scene and disrupting the AGM would have been easy, but I thought there is no sense in letting ego come in between..And that wouldnt have been very professional on my part too..
• Mr.K then asked me how many shares i own? (My shareholding in Mahindra Composites is only 1 share, bought for Annual Report purposes). Upon learning that, Mr.K suggested that i should not bother asking questions, since i hold only one share. So, i asked him if the management of the company treats small and large shareholders differently. To which, he replied yes!!! The entire staff left immediately after the resolutions (which got over in 15 mins), leaving no chance for asking questions.
• Even post the AGM, the CFO was extremely rude and essentially was asking me to get lost (though not directly, of course!)

So what do we gather from this?

1. A good Group pedigree does not automatically mean good management. 
2. As minority shareholders, we have to humbly learn and admit that we are nothing! And sometimes, people like Mr.K will remind us that!! Well, a dose of humility never goes waste! ;-) 
3. Things like these affect investing decision making (I would not buy the shares of such a company where the management thinks that ye to apne ghar ka company hai. Shareholders and all are just a formality!) I just cannot think of partnering with such people, by buying shares of Mahindra Composites. 
4. However, such factors cannot be brought in an excel sheet. So we should all remember that there is life beyond the excel sheet and a huge number of investment decision making factors lie outside the purview of the excel sheet.

So cheers and happy investing!!

Sugar Sector and Mind-maps!!!

Hello and happy AGM season to all!
Sometimes, it so happens that while taking an investment decision, one's thought process becomes more important than fundamental analysis, ratio analysis, etc etc.. (Most of the times, its because one is unable/incapable to do fundamental analysis, etc!!!)

For example, consider me and the sugar sector!! We just don't get along! I hate the sugar sector from the bottom of my bottom! I just cannot make any estimation or take a view on the future of the sector. Here's why..
- The price of raw material (sugarcane) is controlled by the Government.
- The price of the finished product (some of it) is controlled by the Government.
- Imports/exports can also be controlled by the Government.
- Government people aren't very rational lotsa times. One cannot even guess what they can do!!
- Soooo, what can happen to the sugar sector in between all this mess is anybody's guess.

However, it so happens that if one plays a commodity cycle (like sugar) right, the returns can be HUGE. Soooo now, we have a situation, where there could be an attractive opportunity, but we have absolutely no idea how to analyse it fundamentally, etc.

So here is where something called as mind-maps come in. When you want to arrive at a decision using a very structured thought process, mind-maps come in very handy. They are a flowchart kinda thing, where a logical flow of thoughts helps you arrive at a decision.

So I scribbled up a mind-map relating to something in the sugar sector, coz I had nothing better to do at the time! :-D Here it is...

Please click to enlarge

Some more points regarding the same:

• One can totally ignore the sector as such.. No harm in doing that at all. There is no compulsion. Huge number of other (but not comparable) opportunities are available out there.
• If one opts to go this way, one would be holding on to the stock for 2-3 years without having the faintest idea why!!! So it can get very very uncomfortable. 
• If one wants to take an exposure to the sector, one may also want to do a basket approach. Buy Balrampur, buy Renuka and also buy the worst company in the sector! 

Now for some idea killers (a.k.a. why all of the above sucks!)

• Extended sugar cycle depression: You could have a situation where you are stuck in the position for a long looooong time without any decent returns. 
• Capital allocation: How much of your portfolio can one allocate to such a kind of position? Basically, you are taking a position without much 'actual' thought, right?
• Probable opportunity losses: Once capital gets allocated there, one may have to suffer the heartburn of suffering opportunity losses, at least for some time.
• Irrational decision making down the line: If one cannot control emotions here, there can be some irrational decision making one can get into. It wont be comfortable holding positions like this...
• When to sell? While taking the position, one has no idea about the 'value' of the company. So one will have no idea at what price it becomes overvalued, at what price to sell, etc. So it could cause real confusion later..

Anyways, it could very well be the case that you do not agree with me at all. And that's absolutely ok. We are different people, we will have different opinions! Investing is extremely relative. But even if you don't agree with this way of getting into the sugar sector, at least do give a thought to the concept of 'mind-maps'. Its a great way of taking decisions.

Cheers and happy investing!!

Kesar Terminals - whats in store-age?!!

I had written about this about Kesar Terminals (KTIL) here and here. Lets have a small follow-up on the same.

The business:

The business of KTIL is a very simple one. You erect liquid storage tanks at a port, which can store a variety of liquids like chemicals and oils. You rent them out. Simple! Anyone importing or sometimes exporting liquids will need a place to store them at/very near to the port of import/export. KTIL provides this service to such importers/exporters.

• Currently, KTIL has 64 such tanks with a capacity of 1.27 lakh kiloliters right in front of the jetties at Kandla port.
• As part of its expansion plan, KTIL has taken possession of 10 acres of land in Kakinada Port in AP, where it plans to put up dry and liquid cargo handling facilities. Also, KTIL has purchased 16 acres of land at Pipavav port in Gujarat where it plans to put up liquid storage facilities and a container freight station.
• Capex for the same will be Rs.31 cr @ Pipavav for a 36000 TEU CFS capacity and Rs.27 cr @ Kandla for 40000 kiloliters liquid storage capacity.

Currently, the market is valuing this company at an EV of about Rs.48 cr. Now, the business of the company itself is an annuity business. Do a one-time upfront capex and receive rent on it every year. Rentals of course fluctuate as per macro scenario, but KTIL has long term contracts for about 70% of its capacity, meaning that 70% of its tanks will probably never lie 'un-rented'.

Because of the annuity nature of the business, one can attempt a DCF based valuation of the company. Please note that I am not a big fan of DCF. Imho, DCF can be (rather, should be) done only for a limited types of businesses. So, the valuation is merely for reference purpose and I do not claim in my wildest dreams that it is precise and correct! Certain assumptions to the DCF like growth rate of free cash, discounting rate, etc are relative and everybody's assumptions will surely be different, resulting in different results. (That's what makes DCF an analyst's best friend!)

So, after assuming certain things, we arrive at an intrinsic value of Rs.119 per share, against current market price of Rs.83 per share.

So, should one rush to buy the shares, based on this? HELL NO..and heres why..

• Our calculation is entirely based on past and present situation. However, we have to take into account that the company is going for a massive capex over the next 2 year period. Capex of Rs.58 cr (much more than even the current market cap of the company!)..
• For this, the company will have to raise a large amount of debt and possibly, dilute equity too. (In my opinion, raising equity at decent valuations must have been the primary reason for the demerger).
• Due to this, the current free cash, dividend and the more-or-less pretty picture may not last for a period of time in the near future.

So what would I do?

Wait!! To buy more, I would wait for the entire picture on financing to get clearer. How much dilution, how much debt and from whom? (Public deposits/term loans/FCCBs or what?) 

On a different (yet very very important) note, do check THIS out. And consider this...

• CRL Terminals (the company which was sold) is a similar business to KTIL, having capacity of 2.6 lakh kiloliters. Other financial details of the company are unknown.
• KTIL has capcity of 1.27 lakh kiloliters plus land at 2 places.
• CRL was sold for Rs.278 cr. KTIL's market cap is Rs.42 cr, EV is Rs.48 cr.
• Sooo, a business, just like KTIL, which was just 2 times of KTIL's size, was sold at about 6 times KTIL's EV. This was just FYI. ;-)

Cheers and happy investing!!

P.S.: Me and my good friend Ninad have exactly opposite views on investing in KTIL.. So, with his due permission, this post is dedicated to him! :-D