THOUGHTS ON THOUGHTS: Company-specific

Showing posts with label Company-specific. Show all posts

Thursday, December 5, 2013

Powergrid FPO - A special situation everyone knows about

Something which is too obvious and which everyone knows about rarely works in investing. "The crowd is never right" is the gyaan we often hear and experience too.
So when the Powergrid FPO special situation presented itself, the first thing that came to my mind was that this is too obvious, which should be visible to absolutely anybody. So will it work?!

Background

Powergrid has come out with its FPO, priced in a band of Rs.85-90 per share. Retail applicants will get a discount of 5% on the final decided issue price. I am assuming the issue price to be Rs.90 and all calculations are based on the same.
So basically, retail shareholders will be allotted shares @ RS.85.5 per share. As of 5 pm on 12/5/2013, retail applications stood at 4.32 cr shares, against 27.44 cr shares reserved for the category.
The issue is therefore subscribed 0.16 times in the retail category as of now, with tomorrow being the last day for applications.
Even though most retail applications come in on the last day, I feel there is high probability that there will not be any massive over-subscription in the retail category and chances of full allotment are high.
I offer absolutely no view on the company as a business etc. This is merely a play on the situation and not an 'investment' per say.

The situation

Apply for 2200 shares at cutoff price (for retail, it will be max Rs.85.5). Expectation here is that allotment will be full/near full.
Short 1 lot (2000 shares) December 2013 series Powergrid futures @ Rs.92.85. Effectively, you are creating a near 100% hedge and locking in Rs.7.35 profit (by buying at Rs.85.5 and selling at Rs.92.85)
With the issue closing on December 6th, allotment should happen just before December F&O expiry (26th)
On expiry, sell equity shares and cover futures short position (both should be at same/near-same price on expiry, hence we would realise Rs.7.35 profit per share)
The returns here are roughly 8.3% (thats Rs.7.35 on Rs.85.5 invested per share) pre-costs for a 20 day holding period. Not bad!!

Additional points

Ideally, I would have liked to short the January 2014 series futures, but I learnt that January 2014 onwards, the lot size has been changed to 4000 shares, from the present 2000. :-( Hence, one will have to short December series itself, even though it will be a touch and go situation, time-wise.
It seems like the whole world has gotten into this trade, of applying for the FPO/going short on December series futures. Hence, the futures are quoting at a Rs.3.3 discount to the cash market price of Rs.96.15.
The whole trade is of course applicable for only the retail category, making an application under Rs.2 lakhs.

Risks

One big risk here is if the allotment is not full/near full. In that case, the cash-futures position sizes wont match and this would not be an arbitrage trade. Also, if there is part allotment along with a significant rise in the stock price before expiry (worst case scenario), there would be a loss on this trade. (Since futures price would also rise along with cash market price and hence, loss in futures market would be greater than profit in cash market)
Another risk here is if the allotment is delayed beyond December 26th for some reason. In that case, the futures position would expire and we would be left holding only the shares of company, un-hedged.

All in all, its an interesting arb opportunity that makes sense. Point is, it makes sense to everyone, so will everyone earn money in it? Lets see how it plays out.

Cheers and happy investing!!

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. I am not offering any investment advice through these articles. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Thursday, June 6, 2013

Sah Petroleums - Bonus Issue

Hello to everybody after quite some time. I have not been able to update the blog in the recent past due to certain reasons, but I am back, with a whimper at least!

I had written on Sah Petro a couple of months ago. Please do go through the same to get some background on the company. Some of my fears like those regarding inter transfer of shares among promoters did not materialise, which is good! But the generous dividend they recently declared is not so good!

Sah Petro's promoter holding stands at about 87%, with Navis Capital (a PE fund) holding 62% and the erstwhile promoters holding 25%. In order to comply with SEBI's minimum public shareholding norms, the company recently announced the issue of bonus shares to non-promoters. In effect, the promoters will be diluting their own holding without getting any money for it. Now why exactly would a PE fund do this is an obvious question, but thats besides the point because, well, they are doing it!

An anonymous reader requested me to write an article on this situation, hence this post!

Whats going to happen?

Click to enlarge

In effect, if you buy 19 shares of the company at Rs.22 (total Rs.418), you get 23 shares extra. Free! So your holding cost for the total of 19+23=42 shares becomes Rs.418, translating into a per share cost of Rs.9.95. If we consider the taxation advantage we get due to bonus-stripping, our cost would be even lower. Current price is Rs.22, resulting in a fairly large difference. (All calculations are based on the current market price of Rs.22, which is a moving number. Since the stock has been shifted to T2T category, there will be some fall in the price probably).

What should one do?

Our holding cost of Rs.9.95 translates into an effective market cap of Rs.50 cr, on the expanded capital. So, in effect, the question to be asked is; would we be comfortable buying Sah Petro for Rs.50 cr? Well, as of March 2013, the company had Rs.60 cr cash on books, which makes it an interesting proposition indeed. (I do have some concerns here, which are detailed in the earlier post on Sah).

Is there an arbitrage opportunity?

The ex-date is about 1.5 to 2 months away. The arbitrage here is simple. Buy the shares before ex-date for Rs.22 (CMP) and sell them off on or after ex-date (for a higher price than Rs.9.95), resulting in a neat profit within a couple of months. Sounds simple, but we need to answer a zillion dollar question; how much will be price fall on and after the ex-date?!
If we do it mathematically, it would be something like this;

Thats a theoretical and mathematical calculation, but what will the market do? To get a clue, lets learn from history. Another company called Warren Tea also had recently issued bonus shares to comply with the minimum public holding norms. The price action in that stock was follows:

Price before the bonus announcement (21/01/2013): Rs.316
Price immediately after the bonus announcement (22/02/2013): Rs.373 (price exploded. In Sah Petro too, there was a 20% upper circuit on the day of the announcement)
Price before ex-date (20/03/2013): Rs.372. (21/03/2013 was the ex-date)
Ratio: 7 shares for every 10 held, to non-promoters.

If we do a similar mathematical calculation as above, the price on ex-date should have been Rs.334. But what actually happened was quite different.

On ex-date (21/03/2013) itself, the stock closed on the lower circuit, at Rs.298.
After that the slide continued till Rs.215-220, where the stock became stable. (Incidentally, the cost, after considering bonus shares would have been Rs.218!!)
In effect, if you were unlucky enough not to be able to sell immediately on or after ex-date due to the lower circuits, you would not have made much money on this as an arb trade.
The sorry price chart of this whole drama is as follows:

Click to enlarge

The market did not price this mathematically, and therefore, we should not assume that the stock will settle at the mathematically calculated price. Traders and arb guys will sell wholesale post ex-date and it will drift a lot lower. Will it come all the way down to Rs.9.95 is something I cannot predict! However, if it settles at even Rs.12-13, an arbitrage opportunity does exist.

So, what can be done?

This does look like a neat arb opportunity, but I would disregard the same from my mental calculations.
The only question I would ask is; disregarding the special situation, fundamentally, am I comfortable buying Sah Petro at Rs.9.95 (which is a market cap of Rs.50 cr) and holding it? Are the valuations attractive enough at Rs.9.95? Finally that is the base level question, which gives us comfort in case things do not go as per plan.
If the answer to the above is yes, I would surely buy. Arbitrage, if it happens, would be most welcome and an added bonus. (No pun intended)

I feel this is an ok, if not a fabulous opportunity. What do you feel?

Cheers and happy bonus investing!!

4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Wednesday, April 17, 2013

Clariant Chemicals' sale of business - no clarity here!

Lets play a small word association game. I will write a word and you say the first thing that comes to your mind upon reading the word..

1. Stock market (Most of you will probably say high returns, volatility, manipulation, satta, etc)

2. Government (Most of you will probably say lethargic, corrupt, unreliable, etc)

3. Wife (Dangerous territory..so no comments from my side)

4. MNC Management (I am sure most of you will say high quality, clean, professional, fair, etc)

Well, such has been the record of managements of MNC subsidiaries that we generally associate them with everything goody goody. A lot of these companies have been prolific wealth creators for investors over the years. And hats off to these guys.

But, it is not necessary that all MNC managements would be great, fair, transparent and professional. This is not something we can take for granted. Such representativeness bias can be highly dangerous to investors.

Lets take the recent happenings in an MNC subsidiary, Clariant Chemicals India Ltd.

Whenever the name Clariant Chemicals is mentioned, I have always seen experienced investors going gaga about the company. And rightly so. The company has grown profitably and has distributed liberal dividends. So, when the global CEO said in December 2011 that they aim to reach Rs.4600 cr in India sales by 2016/17 (CY11 sales were just Rs.1000 cr), investors sat up and took notice. Of course a management of this quality would have a broad plan under which they were making such claims right? Sadly, that doesn't seem to be the case. Not only have the sales been flat in 2011 and 2012, but recently, the company has announced sale of a large chunk of the Indian business (as a result of sale of the global business unit). Now how will the sales grow to the levels promised is beyond my understanding!!

First, let us look at this deal. The global Textile Chem, Paper Specialties and Emulsions business of Clariant (including Clariant India's business unit) are being sold to SK Capital for about Rs.3000 cr. Since Clariant India's business unit will also be sold, Clariant India will get part of this money. Well, sounds ok.

What is not ok is the way Clariant India has treated minority shareholders regarding this deal.

On 26/03/2013, Clariant India put out an announcement saying that Clariant India will get Rs.209.15 cr out of the total pot for sale of the mentioned businesses. From where did this sacrosanct number come was not given. To be fair, what is being given to Clariant India seems to be a good deal. The global business was sold at about 0.45x sales, while the India business is being given 0.6x sales. We have no idea about the India business profitability though! I was waiting for the postal ballot for this to be published, which would give more details and justification for the deal and what Clariant India is receiving.

I thought that decent clarifications and info will be given when they give out the notice for the postal ballot on this issue. (Since this sale cannot be done without the approval of shareholders).

However, I was absolutely shocked when the postal ballot was put up on BSE. It seems like the management is totally taking the minority Indian shareholders for granted.

Consider this.. the postal ballot is basically to ask the shareholders whether they are ok with the sale of the mentioned businesses for Rs.209.15 cr.
Now, if you want to take a proper informed decision whether to say yes/no on this, you will need info about the business being sold, right?

Shockingly, the explanatory statement to the postal ballot simply states that "TPE business contributes about 35% to the net sales of the company and includes a manufacturing plant for textile products situated at Roha". Thats it!!!!!!!!! It gives absolutely no more details about anything!! So how would you say yes/no to this resolution for selling the business? They are just not giving you any info!!

So basically, does the Board want us to blindly trust whatever they say as true and fair?
Nothing has been mentioned as to who did the valuation, how was the number arrived at?
We do not know how much profitability will reduce, how much fixed assets will go out? In short, there is virtually no info given on how much would the remaining business be like?
So what purpose will this postal ballot serve? How does the Board expect shareholders to take a decision, when they are just not providing any info to take the decision?!

The Board does not seem to take into consideration the minority shareholders' opinion for this. It seems as though they are saying 'look this is what we have decided, just agree to this'. Not the best in terms of corporate governance, eh? I would request all shareholders to oppose this resolution and spread the word to everyone you know to oppose it.
This is just not done.

If things like this continue, then the 'management premium' that the valuations of MNCs were getting will soon turn into 'management discount'!!

Cheers and happy desi investing!!

Thursday, March 21, 2013

Sah Petroleums Ltd and the power of "brand"!

This post aims to serve two purposes; to look into Sah Petro as a company and to look at what branding can do to a product!
Lets start with the latter..

All of us would agree that branding works wonders for any product. Many-a-time, we buy a branded product just because its branded, with no idea about what real value addition the branding has done to the base product!
To give a related example, given a choice, what would you fill in your vehicle; Castrol oil or some unbranded oil? Ok, lets further assume that your mechanic is telling you that there is no technical difference in the two oils, but Castrol costs 60% more..then? I am sure that still, you would prefer Castrol. Why take the risk right? Now what do we know about the technical aspects of engine oil? How is Castrol better? Honestly, we dont. Still, we would prefer it since its 'branded'. And the brand is hammered on our heads all the time through clever, targeted advertising. So we do not mind paying up a bit extra for the branded goods.

Well, you will surely say that this was all general gyaan, which everyone knows. How can one prove it?

Please have a look at the following table; (these are FY11 numbers..FY12 onwards, companies do not give the quantitative info in the ARs. I agree the numbers are dated, but they serve the purpose).

Click to enlarge

Castrol's EBIDTA margin is much higher than the rest of the pack. Its % raw material consumption is much lower than others.
Because Castrol is much larger in size, its advertisement spend is much much higher than others (although in % of sales terms, its the same as others). Higher advertising means you promote your brand more, which gets more customers to go for your brand, which makes you bigger, which enables you to have higher advertising budgets, which means you promote your brand more...and so on..Virtuous circle indeed!!!
This business is kinda simple.. you buy 'base oil', refine it, pack it nicely and sell it out. A bit of differentiation here and there is possible. If you look at the last row in the table, all the players buy base oil at more or less the same price per litre.
But, the second-last line where the difference lies. Just look at the average selling price per litre of all the players. (It is not 100% comparable, since Sah sells transformer oils and unbranded oil too, but the sales break-up is not available).
The bigger your brand is, the more you can claim it to be better than others and then you can have the audacity to price it significantly higher than others. In fact, simply because its priced higher, a lot of people will consider it to be better! :-)
Castrol prices its product significantly higher than others since its products are branded. Sah does not have a great brand and it sells unbranded oil too, so its realisation is far lower, its margins are far lower, its profits are far lower.
The only way to increase profitability in this business is to increase your selling price. And the only way to do that is to strengthen your brand.

So thats what branding can do to your business! Power of brand is truly immense!!

Now lets get back to Sah Petro as a company. Numbers-wise, it appears very interesting and dirt cheap. I would request you to please take a cursory look at the numbers before reading further. The numbers are available on any financial website, so I wont dwell much upon the same. Lets answer a few questions:

Is the business stable in terms of revenues and margins?
The margins would not be stable. These guys carry quite a lot of inventory. A dip in oil prices would lead to a lot of losses. Since they do not have a powerful brand, a lot of pricing power should not be expected. Also, it appears that they punt around a bit in forex transactions and dont disclose it properly too.

Is the management good?
Well, the company is majority owned by Navis Capital, a PE fund (62%). The erstwhile promoters, Sah family holds about 25%, making the total promoter holding of around 87%. The original promoters were not the best-in-class. They used to punt around a lot in the shares of the company. Navis Capital is a PE and will have their own agenda to pursue. I wouldn't give high marks to the management. Also, I cannot understand exactly who manages the company..Navis, who is the majority shareholder? Or the family, who occupies all the executive positions and has founded the company. From the overall scheme of things, I think that the Sah family still runs the company. Will there be conflicts between these two promoters? Maybe!!

What about the cash?
The company carries cash of around Rs.55 cr, against market cap of Rs.80 cr. That makes it very interesting valuations-wise and Graham-wise! The cash-flow is also ok ok..But the problem is, why have they kept this cash? They do not declare any material dividend. (FY11 dividend was 5 paise..FY12 dividend was 1 paisa!!). Probably, they might have conserved this to go for a big-bang advertising spree. Or to guard against any large loss which may happen due to oil price/forex movements. Whatever the case may be, will we see the cash in our hands as shareholders? Seems Doubtful.

Ultimately, wont the PE exit?
Yes, and that will trigger an open offer. But its too early for them to exit. They got into the company in 2008. Usually a PE cycle lasts for 5-7 years, so a likely exit is still at least 2-3 years away. Also, Navis is currently sitting on more than 50% losses on their investment in Sah Petro.

87% promoter holding = delisting!!
These days, the D word is quite a taboo. More and more people I know are swearing never to get into the delisting theme. Logically, one would say that its better for Navis to get Sah delisted, since selling it off later would be easier. The current valuation is not sky high, making delisting a doable and desirable option for the promoter. However, do take a look at their recent insider trading announcements. The promoters have started 'gifting' shares to 'immediate relatives'. Now will these relatives be also considered in the promoter/PAC category? Or will they be classified as public shareholders? From the announcements, it does look like they are in the promoter category, but we will have to wait for the March 2013 shareholding pattern to confirm this. If they are not classified in the promoter category, then bringing down the promoter holding to 75% wont be a big issue and the D word should not be uttered. Lets wait and watch!

Overall opinion
The stock is available cheap, not doubt. But there is a reason why its cheap. I cannot see any trigger which would lead to a rerating or discovery of 'value' in this one. A sudden good quarter would lead to the stock price zooming up, but I do not have the competency to visualise the same. The business is quite volatile, the management is not very comforting and the cash they are hoarding is not being distributed at all. To use cricketing terminology, the stock would be 'well-left' for me as of now. (Fair warning: it can be proven with empirical evidence that the stock price of whatever is 'well left' by me tends to zoom up!)

Do lemme know your thoughts on my thoughts...

Cheers and happy investing!!

Wednesday, February 27, 2013

Quarterly Update - Phillips Carbon and NBCC

Some developments have been taking place in both these companies I track. Hence, the update..

Phillips Carbon - Pain continues..

I had written about Phillips Carbon some time ago. After that, the December 2012 quarterly result has come in. The company reported a totally subdued performance (to be honest, I was expecting a much worse result). I had mentioned some risks in the earlier write-up, many of which have started playing out. Following points may be noted:

CBFS (raw material) prices continue to be high. Over the last one year, they have really spiked up. Although the carbon black prices have also increased, it has not been enough to cover the raw material price increase. The situation is not expected to improve anytime soon and one can expect the next 2-3 quarters to remain subdued. The following table gives a bit of perspective on the matter.

Ratio: Roughly 56 kg of carbon black can be obtained from 100 kg of CBFS. Prices given are blended of domestic as well as foreign and hence cannot give us a 100% perfect view.. * indicates approximate price.

The company's power sales continue, but at lower realisations. Merchant power rates are also not exactly going through a great time.
There is slowdown in the auto sector, which trickles down to a slowdown for the carbon black sector. The company is currently trying to develop its export sales, but given the slowdown in Europe and the China-angle, that seems quite difficult.
There is an interesting comment in the Q3FY13 investor presentation. Post imposition of safeguard duty on Chinese carbon black, "imports in India from China have reduced, however, total imports in India continue to remain the same." :-) That's interesting!
I believe the company will skip dividend this year/declare nominal dividend. So please dont look at the "5.3% dividend yield" based on last year's dividend, shown on most financial websites.
Debt will prove a further drag on performance, specially in a cyclical downturn like the one at present.

All-in-all, nothing great is expected to happen here in the near term. In fact, if auto sales slow down further, the company's performance would nose-dive further. The imposition of safeguard duty does help, but the other risks will undo that help!!

NBCC - Comfort increases..

I had written about NBCC some time ago. My initial thought was to approach this more as a 2-3 quarter trade, since I had discomfort with certain risks which I had highlighted. Post the Q3FY13 result, the management held a concall, which gives me more comfort about the company. Following are some developments regarding NBCC..

The current quarter result was not upto the mark due to certain one-time expenses charged during the quarter. Pension charges of Rs.20 cr and EDC, IDC charges of Rs.5 cr were charged during the quarter, due to which the profitability looks subdued.
During the present FY, the company has purchased 3 additional land parcels (4 acres in Alwar, 4 acres in Lucknow and 2 acres in Ghaziabad) for a total of Rs.100 cr.
The company has not yet booked any revenues for the New Okhla project. The booking will happen in FY14. In Q4FY13, the management expects to book Rs.100 cr revenue and Rs.33 cr PAT for their Gurgaon projects.
In the PMC business, in case of any delay or quality issues in the construction etc, it is the contractor who is penalised if need be. NBCC has no liability on itself. Its position stays protected.
For FY14, the management has guided PAT of Rs.225-250 cr.
Company currently has Rs.1100 cr of cash, out of which Rs.300 cr is theirs and the rest are advances received.
As per norms, the company has to distribute minimum 20% of the profits as dividend. NBCC has been paying out roughly 25%. On the guided profit, that works out to roughly Rs.5 dividend for FY14.
Most importantly, when asked whether the PMC business may be opened up to non-government companies (in which case, NBCC's role will become irrelevant), the management seemed quite confident that under the existing structure, there is no visible threat of the same in the near future. This gives me quite some comfort.

Of course, I intend to hold the stock at least till the New Okhla real estate project's revenue booking happens. But this is one stock I would hold, but actively track. Any negative development on the business front or the capital allocation front would warrant a review of whether to continue holding the stock.

Cheers and happy, safe investing!!

Thursday, January 31, 2013

Goldstone Infratech Ltd. - Another open open-offer!!

The market is full of apparent opportunities, where the hidden risks are huge. A lot of times, the risks become clear only after we have incurred a loss in such opportunities!! (i.e. in hindsight)
Goldstone is another such apparent opportunity, where the risks need to be given due consideration. It is an opportunity which has arisen simply due to legal compulsions and is not backed by proper fundamentals and valuations.

Background

Goldstone Infratech Ltd (GIL) is a Secundarabad based company, manufacturing insulators of various types. Absolutely no comments on the business/fundamentals of the company or the quality of management. (Enough said?!) Currently, the promoters of the company are fighting a case against SEBI in the Supreme Court. The subject matter of the case is an open offer made 4 years ago.

Facts of the case and time-line

A promoter company, Goldstone Exports Ltd (GEL) (renamed as Trinity Infraventures Ltd) used to hold 9.51% stake in the company.

January 25, 2007: GIL’s Board considered issue of 1.5 crore share warrants to GEL, convertible @ Rs.22/share. (Equity at that time consisted of 2.1 cr shares of Rs.4 each). This would take GEL’s stake to 47%, if converted.

February 24, 2007: GIL holds an EGM where shareholders approve the issue of warrants. GEL pays 10% of the amount for the warrants, which are convertible within 18 months.

October 28, 2008: GEL pays remaining amount to get the warrants converted into equity shares.

October 29, 2008: GIL’s Board allots the requisite 1.5 crore shares to GEL. Takeover Code (old) is triggered since GEL’s stake increases from 9.51% to 47%.

November 4, 2008: GEL makes public announcement and comes out with open offer for 20% shares @ Rs.23/share. Price is calculated as per takeover code.

November 17, 2008: GEL files draft letter of offer with SEBI through their merchant banker Saffron Capital Advisors.

SEBI se punga!

While calculating the open offer price, GEL considered January 25, 2007 as the relevant date. This was the date on which the Board had authorised the issue of warrants, hence, open offer price as per GEL's calculation was Rs.23/-.
SEBI objected to this, saying that the relevant date for open offer price calculation should be taken as October 29, 2008. This was the date on which the Board authorised the issue of shares. Open offer price as per SEBI calculation came to Rs.43/-.
GEL felt aggrieved and filed an appeal against SEBI's contention with the Securities Appellate Tribunal. (SAT appeal no.9 of 2009). SAT upheld SEBI's contention in their decision.
GEL continued to feel aggrieved and appealed to the Supreme Court against SAT's order. (Civil appeal no.7666 of 2009)
The case went in a tareeq-pe-tareeq mode from then on, until recently. In the hearing which took place on August 13, 2012, the case has been listed for final disposal. Although that hearing has not yet happened, whenever it does happen, the final decision of the case will be very near.

The opportunity (?)

If the result of the case is in the promoter's favour, open offer will come at Rs.23.
If it is in SEBI's favour, open offer will come at Rs.43 (plus interest). In the meanwhile, the stock price has slid to Rs. 10.5/-.
Promoters hold 50.75% and they have to make an open offer for 20% of the public holding of 49.25%. Interesting!

The risks

Event risk: There is virtually no event risk. The promoter has bought the shares and increased his stake, hence open offer has to happen. The promoters have also given a bank guarantee of Rs.7.5 cr. (Total equity capital of the company is 3.6 cr equity shares of Rs.4 FV).

Time risk: Now this is the most important and very material risk. The whole opportunity is hinged on a court case. We all know that court cases in India can live longer than characters of Saas Bhi Kabhi Bahu Thi. There is absolutely no logical call one can take on when will the case be decided. 1 year more? 2 years more? Dunno! However, in this case, at least an announcement for final hearing has come. So its like one can see the destination, but one still has no idea how far it is!

Shareholder risk: 2 pure financial investors hold about 10% of the company. Now if these big guys start selling for whatever reason, the price will take a massive hit. Since I am unable to value the company, that would result in a really uncomfortable position.

All-in-all, quite an interesting case, with a lot of interesting risks! Before taking any buy/sell call on the stock, please give proper thought to 2 things; your risk appetite and what kind of portfolio allocation should you give to this, if any! Do not rush to buy it. If you buy without much thought, later there will be similar rush to sell without much thought! And when you buy as well as sell without much thought, the end result is usually not very pretty! :-)

Cheers and happy investing!!!

Tuesday, January 22, 2013

Deccan Chronicle results - Boy O Boy!!

I got an early morning call today from a very amused Ninad asking me to go online ASAP and check out Deccan Chronicle's quarter and year-end results for September 2012. Now everybody knows that there have been a lot of problems the company is facing and the whole situation has raised a lot of unanswered questions too. But to be honest, I was totally unprepared for what I saw in the results. The P&L is screwed, but the balance sheet is royally screwed. Check out the result.
Seeing the balance sheet took me back to the days when I was an 11th standard commerce student. Those days, while solving accounts sums in class, we used to do virtually anything possible so that the balance sheet tallies. :-) Something similar seems to be the case with Deccan Chronicle's current results!
The company has extended its accounting year from March to September. So the current year end results are for 18 months vis-a-vis the 12 month period for March 2011 and are hence not comparable. Let us see what all the company has managed to achieve during these 18 months..

Revenues for the 18 month period are down by Rs.190 cr as compared to the previous 12 month period, from Rs.976 cr to Rs.786 cr. Well thats no big deal, it happens.
What is a big deal is that inspite of revenues being down Rs.190 cr, the total expenses are up by a whopping Rs.500 cr! This has been led by a huge increase in the raw materials consumed as well as 'other expenses'. Hmm!
Finance costs are up from Rs.59 cr to Rs.733 cr!! The company has reported a whopping Rs.1040 cr loss during the period.
Public shareholding is up from 36% to 61%, inspite of a buyback being done during this period.

The balance sheet is something which is beyond funny!

The entire reserves of the company have been eroded due to the loss and the net worth of the company (and the book value) has come down from Rs.1280 cr to Rs.10 cr! So much for investing on the basis of book value per share!
Total borrowings have gone up from Rs.713 cr to Rs.3900 cr!! Cash on the balance sheet has disappeared, from Rs.704 cr to Rs.16 cr.
Inventories are down by Rs.110 cr and debtors are down by Rs.120 cr.
So basically, current assets have gone down, freeing up cash, lot of money has been borrowed and cash itself is down. Total cash generation this way is around Rs.4100 cr. So where has all this money raised gone??
Well, fixed assets are up, from Rs.926 cr to Rs.3870 cr. Ahhh so thats where the money has gone. I do wonder what fixed assets they might have bought though.
Point No.6 to the notes says that liabilities includes Rs.3987 cr due to lenders as a result of restructuring of operations and recasting of financial statements! Maaan thats one biggg recast!!

Like my 11th standard teacher used to say.. beta, your balance sheet has tallied, but it makes no sense!!

All this raises the following questions in my mind, a lot of which have no answers!

Has there been an accounting fraud in the company? Well it does seem so, since the company has talked about 'recasting' its financial statements.
Well, so why has there been no admission of guilt, no senti letter from the promoter etc, like in Satyam's case?? Why has no legal action been taken against anybody? Who is responsible?
What was the rating agency doing? They could not locate any problem with the company for quite some time until recently, when it was already too late. Here is an article on the same. So whats the use of a credit rating anyway?
What were the banks doing? Even in the March 2012 result, finance costs are low. Maybe the reported debts were also low. Now suddenly it materialises that a lot of banks have lent them a lot of money!
What were we doing?! Could investors have known about this? I never tracked or held this stock, but I went through the previous years' annual reports after the problems surfaced and to be honest, at least I could not find any problem with them. If it was a well managed accounting fraud, there is no way to find it out!

Lessons learnt:

Primary research is extremely important. Its not that it was an unknown fact that DC was fudging numbers, as this article says. One needs to get out of the excel sheet and annual report to get a better understanding of the business.
Our mind is tuned to availability bias. So everytime some company faces problems like this, we immediately remember the huge returns which risk-takers earned in a Satyam or a Wockhardt-like distressed case. We remember this since this is what gets talked about around us and is available to our brain all the time. No one talks about the huge number of cases on the other side like an Asian Electronics or a Pyramid Siamira, in which investors lost their shirts (and I guess, other assorted items of clothing)
Unless the entire extent and quantum of problem is known, it does not make sense to buy a falling star. People did talk about buying DC when it came down from Rs.100 to Rs.20, saying aur kitna neeche jayega..well its at Rs.5 today and falling. Better to err on the side of being cautious and suffer opportunity losses in such cases.

Cheers and happy, safe investing!!!

Saturday, December 15, 2012

Marg Ltd Open Offer - a lose-lose situation

Marg Ltd (BSE 530543) is a Chennai based infrastructure company. About an year ago, the company had announced a voluntary open offer to acquire 20% of the shares of the company at Rs.91 per share. However, SEBI detected violations of the takeover code in the same and investigations started. This article will make the background of the case pretty clear.

Well, today SEBI has directed the promoters of Marg to revise the open offer price to Rs.340 per share! Article This consists of the 'proper' open offer price of Rs.216, plus interest of Rs.124. The market price of the company's shares was Rs.50 yesterday and the open offer price is more than 6 times the current market price! Promoters hold 54% in the company. Seems like a sweet deal. Well, the market participants have also given its thumbs-up to this development, the stock was up 6% today.

Click to enlarge

I also got quite a lot of emails, pointing out the clear-cut arbitrage available here. Buy the shares at CMP of Rs.53, tender them in the open offer at Rs.340. Even if there is a 50% acceptance, thats big money! How I wish it were that simple.

Please consider the following points, before rushing to place your 'buy' order..

The promoters of the company have fought tooth-and-nail with SEBI against this open offer. They have shown no intention or willingness to go for this open offer.
They have already announced that they will be appealing against this SEBI order before the Securities Appellate Tribunal (SAT).
Now typically, it takes 2-3 years for SAT to arrive at a decision. If the decision goes in favour of SEBI, the promoters have the option to appeal to the Supreme Court (which I think they surely will).
Now, cases in the Supreme Court routinely last for more than 5 years very easily. Cases like those of DISA have been left hanging and there are others which are in process for more than that!
Till the time the final decision of the Supreme Court comes, the promoters have no need to make an open offer. (In fact, even after a Supreme Court decision, the promoters have the option to appeal to a bigger bench of the Honourable Court).
So, lets say 2 years at the SAT and 5 years at the Supreme Court (I am always an optimist!)..this open offer issue will drag on for at least 7-8 years, before a final judgement is given or the promoters settle out of court. (The second option appears very difficult)

So, I think there is a high probability that this open offer will remain open for a long loooonnnggg time!

Are you comfortable holding this stock for, lets say, a decade, waiting for the open offer? One should do proper fundamental analysis and determine the company's value to decide on this front. However, in my humble opinion, the words 'fundamental analysis', 'value' and 'Marg Ltd' should not be used in the same sentence!! :-)

I am very sure that I will be more than happy to give this situation a 100% pass. Muzhe iss Marg pe nahi chalna hai!

If you are thinking of getting into this one, its my request to please think twice, take some rest and then think twice again!

Cheers and happy investing!!

Monday, December 10, 2012

Phillips Carbon Black - Goes in the red!

In this post, I am merely providing an update of some interesting things that have happened with respect to Phillips Carbon over the past year or so, in normal, jargon-free, understandable English! This is not at all a reco to buy/sell (I am a reco-less person) and I would urge readers to digest the info and then take their own buy/sell decisions based on own analysis, logic and common sense.

The basic fundas

Carbon black is used mostly as a pigment, which finds vast application in the tyre industry, among others.
The basic raw material for carbon black is carbon black feedstock (CBFS), which can be obtained in 2 ways; from oil refineries (Indian way of doing things) or through the coal tar distillation route (Chinese way of doing things!). The price of CBFS obtained from oil refineries is directly linked to crude prices.
Well, it so happened that due to increase in crude prices, the Indian way of making carbon black became more expensive than the Chinese way. As a result, the Chinese happily started dumping carbon black in the Indian markets. Being a complete commodity, branding, manufacturer reputation etc just does not matter.
The annual Indian demand for carbon black is about 6.5 lakh tons, while the Indian manufacturers produce about 7.2 lakh tons, some of which is exported.
The Indian carbon black market is a duopoly, with just 2 companies; Phillips Carbon and Aditya Birla Nuvo controlling more than 80% of the market.
Now, till FY11, the Chinese imports of carbon black in India were about 16000 tons annually, which is no big deal. But then, the dumping started. In FY12, Chinese imports increased to about 80000 tons and over the trailing 12 months, have been estimated to have crossed 1.1 lakh tons. Now thats a big deal. If one wants to understand more on this, one can read this notification by the DG - Safeguards. Gives very good data as well as an overview of the sector. (I have highlighted the document for faster reading)
Landed cost of the China-maal is about 18-20% lower (esti) than the locally sold carbon black. So obviously, the local manufacturers could not compete and were severely hit. Phillips Carbon was no exception and the recent results paint a very sorry picture.

What has happened now

The Indian manufacturers obviously got pissed off and made a case before the Govt to impose a safeguard duty on Chinese imports to curtail their dumping.
The Govt found the concerns of the Indian industry valid and a safeguard duty of 30% was imposed on Chinese carbon black for a period of 15 months from Oct 5, 2012. Go India!
Of course, there would be existing stock of cheap, pre-duty Chinese carbon black, yet to be exhausted, so one cannot expect immediate miracles for the Indian manufacturers.

What are the risks if one thinks of investing

The company does something RPG-ish!
Further increase in crude prices
Raw material is heavily imported and rupee is at 54ish.
Severe slowdown in Auto sector, trickling down to severe slowdown for carbon black sector
A really awful upcoming quarterly result is possible!

My thoughts

As far as possible, one should not look at an RPG company as a long term investment. So, at least for me, that door is closed.
However, what does Phillips Carbon earn in a 'normalised scenario'? Well, Rs.1800-2000 cr of sales with 6-7% PAT margins seems doable for the company. So, is Rs.100 cr PAT? Easily possible. Btw, the stock price has drifted down from Rs.220ish to Rs.95 over the last two years, giving a market cap of Rs.330 cr at present. Interesting!
So whenever the company starts showing improved profitability, the market will reward it with a nice spurt in the stock price. Forget EPS growth, forget 're-rating'..even a 'reversion to mean' can give good returns in this case.
Now, the big question is - when will this happen?! While I will not talk about that, I can say that I dont think it will happen in this quarter's (December) result, since existing cheap Chinese stock will take time to get exhausted. December result may also be equally bad, in which case the stock price will take a further hit. But this does have potential as a 2-3 quarter short term puff!

So will Phillips Carbon start batting properly or will it get bowled by the Chinaman?! Time will tell!

Until then,

Cheers and happy investing!!!

Friday, November 23, 2012

Noida Toll Bridge - A few (disturbing) developments

Noida Toll Bridge has been a favourite of a lot of value oriented investors for a variety of reasons. Those who are not acquainted with the company may please go through this very very detailed report on the company. Specially, as seen in the recently quarterly results, since it has become a net-debt-free company, a lot of people are sitting up and taking notice. I will not dwell upon the troubled past of the company. The company has excellent cashflows and debt is all set to be repaid over the next couple of years. The expectation that good amount of dividend payout will happen from next year onward makes this stock very interesting indeed.

However, a couple of quarters ago, this note in the quarterly result caught my attention.

Click to enlarge

It was quite odd that the Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed the details of the same.

Then came the news about 10 odd days ago that the company had hiked the toll rates for the DND flyover. This was completely legal and within the terms of the agreement that the company had with the Government. However, this decision did not go down well with the masses. (Yes, the same thing has happened before too.) There were mass scale agitations (news article) against the company by the Federation of Noida Residents Welfare Association. Other bodies have joined in the agitation too. They have also filed a PIL against the company. Broadly they think that the original MOU (agreement) which the company had with the Government itself is unfair and needs to be scrapped!!! They have "also written to the UP Chief Minister to review the MOU and take back the DND Flyover and make it free" !!!

So can the Government do this? Apparently, yes, its very much possible!! The Government can review and modify terms of an existing project like this 'in public interest'. Please go through this article in which the authors have stated that this is a common practice internationally and they have given examples of the same being done too! (To be fair, I have not come across anything like this being done in India so far.)

In the meantime, the company has succumbed to the public pressure and has rolled back the hike in toll rates.

How does this affect the investors in Noida Toll Bridge? The shareholders have waited for an awfully long time to get any sort of returns on their investment. The report that I posted in the beginning talks about the really hard time that the company went through in the initial phases. Now that good times could start for the company and its shareholders, these new developments have popped in. Few things that could happen..

There could be massive hue and cry about the 'unjust' and 'unfair' levy of toll on the DND Flyover with demands that the toll be scrapped. The Government could indeed play its 'in public interest' card and modify the MOU or scrap it completely. The company could then go to court, etc etc. (I think chance of this happening is remote)
Also, the company has rights to develop a large parcel of land near the flyover, which could be objected to for a variety of reasons by a variety of parties! :-) (I think chance of this happening is high)
Or of course, nothing of the above might happen. However, given the massive publicity and media coverage given to this, the company will find it extremely difficult, if not impossible to raise toll rates in future. (I think the chance of this happening is very high)
Of course, the Government might do some minor modifications to the MOU to appease the parties involved and then it could be life as usual for the company. (I think the chance of this happening is fairly high).

The shareholders today do face a terminal risk to their investment in the company. Even though one may argue that the possibility of this happening is remote and probability is small, the risk is such that if it materialises, the entire company and its business model will be finished. Low probability, super high risk event!! I am not at all saying that the company is a surely bad investment (whether it is good or bad is every individual investors' decision), but anyone making investment in the company's shares should keep this risk in mind for sure. The stock is surely 'cheap' and its DCF looks great in an excel sheet, but then these out-of-excel risks are also very material to note and consider in the investment decision making process.

Let us all hope for a proper and fair resolution to this whole Do Not Disturb Flyover issue!

Cheers and happy investing!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Saturday, November 17, 2012

Disa India Ltd - Update

Disa India Ltd has come out with the following announcement yesterday..

DISA Holding A/S (the "Seller") has submitted to BSE a Notice of Offer for Sale an aggregate of upto 173,483 equity shares of face value of Rs. 10/- each of Disa India Ltd. (the "Company and such equity shares referred to as "Sale Shares") aggregating to 11.487% of the total paid up share capital of the Company as on November 15, 2012 by Promoter through a sale on the separate window provided by the BSE Ltd for this purpose.

The Sale shall take place at the separate window of the BSE Ltd and shall commence on November 20, 2012 at 9.15 a.m. and shall close the same day at 3.30 p.m. Indian Standard Time ("Sale Date").

So it seems like delisting is off. Monday should be 'interesting' as far as the stock price is concerned! :-) This is one more nail in the coffin for the 'delisting theme' in the Indian markets.

What is more interesting (and coincidental) is a conversation I had with my good friend Niren over a cup of our daily chai. It was a huge coincidence that we discussed Disa yesterday afternoon and this announcement came in the evening. (All unparliamentary words have been edited from the conversation! :-) )

Niren: So what do you think about the business at present? Clearly there is a slowdown.
Me: O yes, no question about it. Overall, new capex is happening slow or is being differed. The situation is not very great at present as is visible from the last 3 quarters results. So even though the potential is quite huge, conversion of the same in terms of numbers is not happening at present.
Niren: So do you think its cheap at present? Would you buy?
Me: O no not at all. I dont think its cheap at present to buy. But its not expensive enough for me to sell too!
Niren: And what about the delisting angle?
Me: Logically, I think they would delist. They have transferred the disputed shares in quite a hurry, maybe to delist before the deadline. Also, the parent is a private equity group. For them, an unlisted company would be much more easier to sell, whenever they decide to exit.
Niren: But this is not a very big part of the overall group worldwide. Would the parent care enough to delist?
Me: Ya, looking at their actions and thinking from their point of view, I think it makes sense for them to delist.
Niren: Hmmm...

HAHAHAHAHAHAHA!!! I am sure Niren is laughing too. We had this discussion and their announcement came in a couple of hours after that.

On a serious note, lessons learnt:

We are not as smart as we think! Logic, mindmaps, 'thinking from their point of view' etc etc. will not always work :-) Market always does stuff to remind us of this fact and keep up humble.
More importantly, this further reinforces my belief to always always always look at the valuations. In Disa, if the business wasnt good and valuations were too irrational, I would have totally panicked after this announcement came.
Special situations players should take this as a big warning regarding so called delisting stories which are quoting at extremely irrational valuations. If valuations do not make much sense, then its not worth the risk hanging on, hoping for delisting.
All decisions should be taken on the basis of the underlying business and its valuations alone, without getting distracted by events and news. This helps maintain rationality in decision making.

Cheers and happy investing!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional analyst, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Thursday, November 15, 2012

CMI FPE Ltd. - Interesting, but still work-in-progress..

Wish all of you a very happy and peaceful Diwali..

Well, I often take up the following exercise in my class. You may find it interesting too..

Say there are 2 companies A Ltd and B Ltd. Both are textile companies of the exact same size, having same margin, same products, financials and similar quality of management.

Now say that A Ltd has just bought a new machine, which increases their productivity and thereby, their margins by 5%.

Given a choice, which company's shares will you buy?

Usually, people say A Ltd, which might be your answer too. What if I tell you that there are 3 choices. (No, 50-50 in A and B Ltd is not the third choice).

Well, an interesting answer (I wont call it the right answer) is; You should buy neither A Ltd nor B Ltd shares. Given a choice, you should buy the shares of the company which manufactures those machines!!!

The funda is very simple. What stops B Ltd from purchasing the same machine tomorrow? When their margins increase too, they might start a price war to gain market share. In the process, none of the textile companies will benefit. Only 2 parties will benefit; the end consumer and the machinery manufacturer!
When any sector goes through a boom phase, if one can go up the chain and identify the capital equipment manufacturer, that can become a better investment than the players in that sector! Well, if you would have identified this in the textile sector, in the context of the TUF scheme, you would have invested in Lakshmi Machine Works and your investment would have been up more than 10 times in about 10 years. Not bad!

Without drifting further, I should come straight to the topic of the post - CMI FPE Ltd. As mentioned in the title, it is still WIP for me. I think I need to do a lot more study on the company.

Background

CMI FPE was earlier known as Flat Products Equipment India Ltd and was set up by Late Dr. T.R.Mehta, who was basically a technocrat. He sold the company to the Belgian group CMI in 2008 since he did not have a successor to run the company. CMI also bought a Pvt Ltd company of the promoter, which is now named as CMI Industry Automation Pvt Ltd. CMI currently holds 75% stake in CMI FPE and 100% stake in CMI Industry Automation.
The company is basically a provider of capital equipment required by the steel sector. The company manufactures products like Cold Rolling Mill Complexes, Galvanising Lines, etc. The group is one of the largest and the lowest cost manufacturers of this equipment in the world.
Its but obvious that the fortunes of the company are pegged to the fortunes of the steel sector, which is not exactly going through a rosy period right now. But after all, steel is a cyclical sector and when it turns around, CMI FPE could benefit bigtime, like in the example above.

Basic Financials
Market Cap: Rs.330 cr (CMP Rs.670) (One may note that in FY11, the company recorded sales of Rs.437 cr and PAT of Rs.47 cr. There was Rs.25 cr other income)
By and large debt free. Works on customer advances. PE ratio etc would look ridiculously high, since the last few quarters have been quite bad. Dividend payout at 20ish % has been ok.
Excellent cashflow generation till FY11. FY12 has been bad for the company on all parameters.

Positives

The company works in a very niche sector, with best-in-class technology having huge entry barriers.
The company is supported by a very strong parent, having global presence.
From what I could find out, CMI FPE is now the only manufacturing outfit of the entire group globally in this business line. Outsourcing opportunities could be huge.
Slowly, the company is also expanding into new products like PLTCM and providing ancillary services to its clients.
The company has a strong order book position. (estimated to be more than Rs.800 cr)
The cashflows are strong, since the company works on advances from customers.
I really liked the management's approach. Currently, the company is going through a tough time. During this period, instead of taking a step back, the management has chosen to modernise and expand the company's facilities. Please go through this and this very carefully. Basically, the management has chosen to bear short term pain and keep themselves ready to take advantage of the time when the cycle turns. Also, expanding capacity during a slowdown is usually cheaper. Such contrarian thinking is something which I honestly like.

Negatives

Of course, the biggest negative currently is that their customer sector is going through a tough time. Capex is being differed all over the world by steel companies. Consequently, inspite of having decent order book, execution of the same is being differed by customers of CMI. The pain is very much visible in the recent quarter numbers. (Actually this is why I started looking at it in the first place.)
I am unable to get a proper hang of the steel cycle. So, will the wait for the cycle to turn be a short one or a super long one? Thats something I do not know.
If one looks on the traditional 'value' parameters such as PE, dividend yield etc, this stock will look insanely expensive and wont appeal to many. But I think just looking at the company in number terms is not right. Business and products is what is also important.
CMI FPE has doubled its capacity, even though its existing capacity may not be fully utilised. This will surely lead to increase in the overall fixed cost of the company. As a result, till business conditions improve, the results of the company will look even worse.
Things are a bit opaque on levy of royalty/technical fees etc by the parent on the Indian company. I am not still clear on that front.
There has been recent announcement that the parent would be merging its own 100% subsidiary into the listed company. The details of the merger and the valuation etc has not yet been announced. But it could lead to a corporate governance issue. I am sure everyone remembers the Akzo Nobel incident. Corporate governance issue = derating and further drop in stock price. Howeverrrr, there is one more angle of looking at this event. Hint: Current promoter holding is 75%. The merger would result into the promoter holding going beyond 75%. An MNC subsidiary which could have 75% plus promoter holding, where stock price has been massively hit due to unfavourable business cycle..hmmm.. I will not say more because the D-word is a taboo currently!! :-)

So all-in-all, I find this to be a very interesting case worth studying in-depth. Primary research and things such as talking with industry people, getting multiple views and angles is very important when needs to get out of the excel sheet and understand the business properly. As I said earlier, a lot more work needs to be done on this..

Cheers and happy investing!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Tuesday, August 21, 2012

NBCC - Fantastic business and 'sitter' valuation, but...

National Buildings Construction Company (NBCC) is a BSE, NSE listed PSU. The company came out with its IPO in March 2012 at Rs.106 per share. The current financials of the company are as under:

Seems great! I can almost see all the Graham fans salivating!!
Well, it gets even better!

Unlike a lot of companies, where cash is more than market cap, this company is not facing any problems on the business front.

The business:
NBCC's business is pretty straight forward. It operates in 3 segments;
1. Project Management & Consultancy: In this segment, the company does residential and commercial civil work for various Govt departments. e.g. a ministry wants to build a new building or a new housing colony is to be constructed for Govt employees, NBCC is appointed to carry out the work. NBCC itself does not engage in any construction activity, but outsources it to other parties on a tender basis. NBCC thus acts as a nodal agency for the Govt, providing project management and consultancy services. It gets anywhere between 6-10% of the project cost as its fees.
2. Real Estate Development: In this segment, the company owns land and acts as a developer, constructing and selling commercial and residential real estate. The company has land bank of 125 acres spread over various cities in Northern India.
3. Power Sector: This is a smaller business segment, where the company does civil work for power sector projects. e.g. construction of cooling towers, chimneys and such other structural work.

Consider the following additional points:

Business is booming. The company has a current order book of more then Rs.10000 cr, while its FY12 sales stood at Rs.3500 cr. Being a Govt driven business, it is not as affected as other companies due to various negative macro factors.
The business does not require a lot of capital, since NBCC itself does not do any civil work. It outsources the work. The company therefore generates excellent cash and gets large advances. Fantastic business!!
One large commercial real estate project of the company at Okhla is nearing completion. It is expected that this project alone will generate revenues of Rs.400-450 cr and profit of Rs.180-200 cr! (Since accounting is done on completed contract basis, nothing has been booked yet).
NBCC has been granted CPWD (central public works dept) status. Hence, it is eligible to get numerous Govt civil construction contracts, which are otherwise not open to other companies.
The company has a large land bank and numerous real estate projects in progress. More details on the same can be obtained here.

Now the obvious question..you have a company having cash on book greater than market cap. It also has a low-capital, virtually recession proof, assured business. It also has valuable assets (land). It pays full tax and gives decent dividend too. So why shouldn't one buy this left right and centre?! Well, before you do that, let me ruin your happiness by putting forth some more points!!

The biggest problem I have with the company is that the company's promoter is an extremeeeeeeely irrational being. The promoter is known to take decisions which make no business sense. In this case, e.g. if the promoter 'directs' the company to put money into, lets say, a large BOT project..or the promoter 'directs' the company to put money into an ailing power project, or buy a coal block! Not only will this entire cash on books disappear, but the company will be additionally saddled with debt. When will this happen? Maybe never..maybe tomorrow! Improper capital allocation is the biggest risk..There will always be this hanging sword for investors in this company and good investing cannot be done with swords around! :-D
The 'cash' that one sees on the books does not entirely belong to NBCC. About Rs.500 cr is the company's own money, while the rest comes from advances received. On this related topic, do read this excellent post by Prof Bakshi.
FY12 contingent liabilities 'claims not acknowledged as debts' stand at Rs.1055 cr! Thats quite a lot! I couldn't get much info on the nature of these contingent liabilities.
The business is virtually tailor-made for corruption!!! NBCC gets contracts and outsources them to others. A corrupt official can easily earn a bit 'on the side' in this process. If a large scale corruption scandal comes out, it will hit the reputation, valuation and market cap of the company! (There are corruption cases against 16 employees of the company already, as per the RHP).
There were newspaper reports and talks about the company getting into power generation!! Boy that would be a real bad capital allocation decision, considering the excellent current business. Although the company has denied this, the RHP talks about the company's intentions to get into BOT/BOLT/BOOM projects.

Conclusion

The capital allocation overhang will always remain in this particular stock. Market will always be edgy, expecting the company to piss off money into some unrelated business, just because it is 'directed' to do so. With an overhang like this, its difficult that the company will get premium valuations. The cheap stock will remain cheap and may become a typical value trap. If the company really does waste cash like it is feared, then one can expect the market cap to drift a lot down too!
In my opinion, if you want to make a lot of money, investing in this company is not for you. But if you want to avoid losing a lot of money, this company is worth a look for you. Whatever you may decide, in case you invest, it would be wise to always keep tabs on what the company is doing and how it is allocating its capital. It shouldn't happen that you wake up one fine day with a big loss in the stock, then you start investigating and then you find that the company has just blown money away. Being vigilant is a must!!

Cheers and happy investing!!

Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision.
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

THOUGHTS ON THOUGHTS

Thursday, December 5, 2013

Powergrid FPO - A special situation everyone knows about

Thursday, June 6, 2013

Sah Petroleums - Bonus Issue

Wednesday, April 17, 2013

Clariant Chemicals' sale of business - no clarity here!

Thursday, March 21, 2013

Sah Petroleums Ltd and the power of "brand"!

Wednesday, February 27, 2013

Quarterly Update - Phillips Carbon and NBCC

Thursday, January 31, 2013

Goldstone Infratech Ltd. - Another open open-offer!!

Tuesday, January 22, 2013

Deccan Chronicle results - Boy O Boy!!

Saturday, December 15, 2012

Marg Ltd Open Offer - a lose-lose situation

Monday, December 10, 2012

Phillips Carbon Black - Goes in the red!

Friday, November 23, 2012

Noida Toll Bridge - A few (disturbing) developments

Saturday, November 17, 2012

Disa India Ltd - Update

Thursday, November 15, 2012

CMI FPE Ltd. - Interesting, but still work-in-progress..

Tuesday, August 21, 2012

NBCC - Fantastic business and 'sitter' valuation, but...

Blog Archive

Labels