GEECEE ventures

• The company has sold of some assets and has cash equivalents ranging from 292 Cr to 441 Cr (Refer calculations at the end), so calculations of cash equivalents per share range from 86 Rs to 200 Rs
• The company has sold of its chemical plant at M.P and Windmill at Maharashtra as of September 2009 to Lanxess India Ltd (http://lanxess.in/en/about-lanxess-india/)
• Existing plants: Chemical plant at Ankleshwar, Gujarat and Windmill at Jaislmer, Rajasthan
• Promoter holding: 58.76%
• Intends to invest the proceeds in ventures like NBFC and power-generation (including wind-power). This it intends to do over a period of coming two years.
• It has completed a share a buyback of 40.50 Lakh Shares in April 2010 (Total outstanding shares after buyback = 206 Lakh shares)
• The buyback was at a price of 120 Rs, the promoters also sold some of their holding, so even after the buyback their net-holding almost remained same:

So more than “buyback” it was more of “take some money away from the company” kind of scheme?

• Shyamsukha’s and Aroni commercials are promoters. They spent around 48.6 Crores in share buyback

• Active Subsidiaries: Gwalior chemicals bvba, Belgium. (Accumulated losses of 3271 Euros = 8 Lakh Rupees),  GCIL Finance, accumulated profit of 69 Lakhs
• The company had a loss of 131 Lakhs from operations for the June 2010 Quarter, but other income constituted 280 lakhs (what is this other income? Not sure), so net profit was 165 Lakhs.
• The company has given unsecured loan of 9258.7 Lakhs (at 7% rate of interest) to subsidiary company GCIL Finance. (Even though annual report suggests the loan is being paid back, the subsidiary seems to be paying back the loan, as it the loan outstanding loan amount has been coming down)
• The company has following investments:

• Ignoring other unquoted investments, the company has investments worth 17,243 Lakh

• Sundry Debts worth 330.71 Lakhs
• Cash on hand 654 Lakhs

• Loans and Advances (considered recoverable) , deposits worth: 16,600 Lakhs

• As you can see, there is an amount worth 56.88 Cr which is holdback amount from the sale of assets to Lanxess India. This amount is held in an escrow account, and according to the annual report will be included as extraordinary income as and when they receive it.

• Current Liabilities and provisions are at 8862 Lakhs, But the provisions includes the 56.88 Cr holdback amount
• So let us compute the provisions without the 56.88 Cr holdback amount: 2136 Lakhs
• The company has net asset block + Capital WIP worth 3633 Lakhs
• Let us consider the cash + cash equivalents per share:

Number of outstanding shares in Lakhs	206.27
Serial number	Item	Amount (in Lakhs)
1	Quoted Investments	17243
2	Sundry Debtors	330
3	Cash on hand	654
4	Holdback amount in escrow account	5688
5	Loans and Advances (not including holdback amount of 56.88 Cr)	10989
6	Liablities and Provisions (not including holdback amount of 56.88 Cr)	-2136
7	Outstanding loan to subsidary GCIL Finance	9258
8	Debt	-22.57	Small amount,Ignore
9	Outstanding loss from susidary Gwalior Chemicals Belgium	-2.43102	Small amount,Ignore
Scenario 1: Not considering 56.88 Cr holdback amount
Cash equivalents, add serial numbers: (1+2+3+5)	29216
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	131.1630338
Scenario 2: The outstanding loan given to subsidary goes bad
Cash equivalents, add serial numbers: (1+2+3+5)	29216
Liabilities, add serial numbers (6+8+9+7) (The outstanding loan given to subsidary goes bad)	-11419.00102
Net cash per share	86.28011335
Scenario 1: Considering 56.88 Cr holdback amount (and loan given to subsidary goes bad)
Cash equivalents, plus holdback amount add serial numbers: (1+2+3+5)	34904
Liabilities, add serial numbers (6+8+9+7) (The outstanding loan given to subsidary goes bad)	-11419.00102
Net cash per share	113.8556212
Scenario 1: Considering 56.88 Cr holdback amount (adding the outstanding loan amount given to subsidary)
Cash equivalents, add serial numbers: (1+2+3+5+7) (adding the outstanding loan amount given to subsidary)	44162
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	203.6214621
Scenario 1: Considering 56.88 Cr holdback amount (without adding the outstanding loan amount given to subsidary)
Cash equivalents, add serial numbers: (1+2+3+5) (adding the outstanding loan amount given to subsidary)	34904
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	158.7385416

I think the biggest worry for the stock is what the promoters did earlier: “the buyback” where they sell their own stake. This was the reason the stock came down from 90 – 100 Rs to 64 Rs. I might be willing to take a bet on this one though.

As usual feedback, criticisms, counter arguments are hugely welcome and  appreciated a lot.

Number of outstanding shares in Lakhs	206.27
Serial number	Item	Amount (in Lakhs)
1	Quoted Investments	17243
2	Sundry Debtors	330
3	Cash on hand	654
4	Holdback amount in escrow account	5688
5	Loans and Advances (not including holdback amount of 56.88 Cr)	10989
6	Liablities and Provisions (not including holdback amount of 56.88 Cr)	-2136
7	Outstanding loan to subsidary GCIL Finance	9258
8	Debt	-22.57	Ignore
9	Outstanding loss from susidary Gwalior Chemicals Belgium	-2.43102	Assuming currency conversion rate of 1 Euro = 62 Rupees), Ignore
Scenario 1: Not considering 56.88 Cr holdback amount
Cash equivalents, add serial numbers: (1+2+3+5)	29216
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	131.1630338
Scenario 2: The outstanding loan given to subsidary goes bad
Cash equivalents, add serial numbers: (1+2+3+5)	29216
Liabilities, add serial numbers (6+8+9+7) (The outstanding loan given to subsidary goes bad)	-11419.00102
Net cash per share	86.28011335
Scenario 1: Considering 56.88 Cr holdback amount (and loan given to subsidary goes bad)
Cash equivalents, plus holdback amount add serial numbers: (1+2+3+5)	34904
Liabilities, add serial numbers (6+8+9+7) (The outstanding loan given to subsidary goes bad)	-11419.00102
Net cash per share	113.8556212
Scenario 1: Considering 56.88 Cr holdback amount (adding the outstanding loan amount given to subsidary)
Cash equivalents, add serial numbers: (1+2+3+5+7) (adding the outstanding loan amount given to subsidary)	44162
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	203.6214621
Scenario 1: Considering 56.88 Cr holdback amount (without adding the outstanding loan amount given to subsidary)
Cash equivalents, add serial numbers: (1+2+3+5) (adding the outstanding loan amount given to subsidary)	34904
Liabilities, add serial numbers (6+8+9)	-2161.00102
Net cash per share	158.7385416

Searching for value – Some Themes

One of the problems I was confronted with, was how best to form a “short-list” of stocks to investigate.  One of the things I am attempting now it have certain “themes” and then search for stocks which match these themes.

Here are the set of themes I have thought about until now:

1. Debt Theme: The company is in the process of restructuring or retiring debt and leading to a reduction of the debt component. Potentially this will result in a decrease in interest paid and hence an increase in EBDIT .

How to locate such stocks:

• Look for news related to debt restructuring/retiring

• Make a short list of companies with high debt/equity ratio, still with decent operating cashflow, and keep a watch for debt restructuring/retiring

2. Net-Net Assets Theme: Net-Net Assets = (Current Assets – Current Liabilities – Long term debt). If the Net-Net assets per share is more than the CMP, then the stock might be a bargain.

How to locate such stocks:

• Shortlist stocks that meet Net-Net assets criterion from the balance sheets

3.  Catalyst Theme: This theme has got to do with value-unlocking in the stock. There are many situations in which the stock will be suddenly “valued” not from the “usual business” point of view (pov), but from a totally different pov. Examples include: Assets of the being sold, Acquisition.

I am still now sure about how to find out such stocks. The idea is to anticipate “value-unlocking”, it wont do us much good if we get onto bandwagon when the whole world knows about it.

More about Catalyst theme from Prof. Sanjay Bakshi

4. Turnaround Theme: Look for companies with negative annual PAT for the past years, but possibly turning positive for this year, the signs might include: an increase in sales for the quarter, increase in EBDIT.

How to look for such stocks:

• Make a list of companies with negative PAT for the past years, look for signs of turnaround in the quarterly results. (be aware of cyclical stocks)

5. Debt Capacity Theme: The idea is to figure out if any of the companies are undervalued by comparing the debt capacity of a firm to the market cap. I have borrowed this from this Sanjay Bakshi article.

Debt capacity is defined as the amount of the debt the company can serve comfortably. Consider an interest coverage ratio of 3 or above, this gives us

Interest Expense  = EBIT / 3

(It will be wise to take an average of the EBIT to avoid considering cyclical stocks)

For a firm which has a interest coverage of 3, many firms will be willing to lend at attractive interest rates. Let us assume an interest rate of 10%.

So the debt the company can serve = (Interest Expense * 100)/(interest rate)

If this dept capacity is less than the market cap, the stock might be undervalued.

How to locate such stocks:

• Make a list of companies with market cap – debt capacity ratio less than 1

Khaitan Electricals

My twitter friend Soham Das (@sohamdas) who is one of the best minds I have ever acquainted with, suggested I analyze KHAITANELE. So here is the post. He also has provided great feedback in the comments section.

Khaitan Electricals.

Historical EPS:

2005	2006	2007	2008	2009
3.50	9.70	10.38	11.78	-4.16

The reported EPS seen a year-on-year growthof 20% until 2009, where it dropped -4.16. Superficially it might appear that there was huge drop in revenue and lead to the loss.

There was a drop in sales, but that was not the reason for loss. The loss because of an exceptional item of about 9 Cr (loss due to fire).

This is one reason , why just looking at EPS may not make sense, (especially in screening). We need to know the real reason for a drop in EPS.

The reported cash EPS for 2009 was around 5Rs per share.

Year 2009 saw sales of 285.70 Cr in sales and a profit of 10.66 Cr, with this in mind, lets look at what was the quarterly sales in year 2010:

March 2010 Quarter: Sales: 152.47 Cr Profit: 7.2 Cr and an EPS of 1.89 Rs

June 2010 Quarter: Sales:  99.41 Cr Profit:  4.79 Cr and an EPS of about 1.08 Rs

The turnaround in sales is amazing when compared to 2009.

Let us analyse from purely an assets point of view:

1. The company has reserves of 88Rs per share excluding all the debt.
2. The company has fixed assets worth 35 Cr (book value), that amounts t0 30 Rs per share
3. Total ( 88 + 30) ~ 118 Rs
4. If you consider the net current assets, they are around 200 Cr ==> 173 Rs per share

So let us assume the company does an annual sales of around 480 Cr (150 + 90 + 150 + 90), and a profit of 24Cr, that is an Profit per share of around 20 Rs per share. If they do achieve these sales figures it will be positive surprise. But it might be difficult to sustain the sales achieved in the first two quarters.

The CMP is around 140 Rs after a huge jump from 120 levels.

The downside seems to be limited and I will possibly buy.

This exercise confirmed what I was thinking about a few days back: Just looking at EPS and some ratios for screening may not be beneficial.  Its just as Sidhu once said “Statistics are line mini-skirts, they do provide some guidelines, but they hide important information”.

I should come up with a better way to screen stocks, one idea I was working on right now is to look at price to net profit ratio within stocks of the same sector and then shortlist for further analysis.

Analysis – Garware Wall Ropes

GARWALLROP is engaged in the manufacturing of Ropes & Yarns made of nylon and plastic polymers of various sorts and nettings.

P/E: 9 to 10
P/B: 0.85
D/B: 0.51

Promoter holds 55% of the stock, which is a plus.

Pretty much consistent EPS, except for one quarter in Dec 2008, where it was EPS of -2.05. The growth in revenue or profit growth is not spectacular, but I am analyzing it from Net Assets point of view:

a) Net-Net assets per share: 23 Rs
b) (Reserves – Long term debt) per share: 31 Rs per share
a + b = 54 Rs

Net assets per share: 51 Rs
These caluculations are according to 2009 Annual Report, the last quarter results were inline with earlier results.

So given that share trades about 20-25 Rs above the 54Rs (which is (Net-Net Assets + Reserves) with Debt removed twice, to be conservative), it is a bargain. I went through the corporate announcements and did not find any major negatives.

I have bought a small position and see how the stock moves.

First Attempt: CFHL- Value or a dud? – Part 1

I intend the analysis of this company (CFHL)to be a learning for me and I will present it in parts. I will keep updating the blog as I proceed further with my analysis:

CFHL (Consolidate Finvest & Holdings Ltd) turned up in my search for companies with low PE (between 0 to 5) and low Price to Book Value ratio (between 0 and 1). Basically I was looking for companies which are trading near or below the book value.

CFHL initially appeared to be a very good buy with a low P/BV and zero debt. But further analysis has thrown up more questions than answers.

Quick background info:

CFHL is listed as an investment company on NSE, and it has majority stakes in various Jindal Group of companies. Its primary investments in subsidiaries as of August 2009 are in:

Jindal Photo Investments Limited – 100%

Jindal Finvest & Holding Limited – 100%

Jesmin Investments Limited – 83%

Further a look into the shareholding pattern throws up interesting things:

There around 8 promoter companies/individuals who own shares in CFHL. These include:

	Number of shares	Shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C) indicated in Statement at para (I)(a) above}	Number of shares	As a percentage	% of Grand Total
1	Jindal (India) Ltd	38000	0.12	0	0	0
2	Shyam Sunder Jindal	172520	0.53	0	0	0
3	Bhavesh Jindal	375635	1.16	0	0	0
4	Jindal Polyster Ltd	1186246	3.67	0	0	0
5	Aakriti Jindal	1187753	3.67	0	0	0
6	Rishi Trading Co. Ltd.	4717033	14.59	0	0	0
7	Soyuz Trading Co. Ltd.	5262242	16.28	0	0	0
8	Consolidated Photo & Finvest Ltd.	10185335	31.51	0	0	0
TOTAL		23124764	71.53	0	0.00	0.00

I could not find any details about Rishi Trading, Soyuz Trading and Consolidated Photo & Finvest companies which own a substantial chunk of the company. Are these companies pure holding companies or do they operate? Do these companies possess hidden debt which in turn might have a negative effect on CFHL

The second recurring pattern that I gleamed from corporate announcements is about “demerger and  amalgamation scheme”

The scheme proposed that the:

1. Financial/Investing part of CFHL be demerged into a new entity and amalgamated with Jindal India PowerTech Ltd and henceforth called “Jindal India PowerTech Ltd” (JIPL)

2. The business holding part (where the company has invested in other Jindal Group companies) be demerged to form Jindal India Finvest & Holdings Ltd

Jindal India Power Tech is a holding company of Jindal Thermal Power Ltd, which my guess is running a project overrun by costs?

This particular scheme was proposed and withdrawn twice with an year (2009-2008); with a petition pending in high-court of Allahabad.

All of this analysis up until now has thrown up these questions/points:

1. What is per share value of cash/cash equivalent? Calculate it?

2. Is Jindal India Power Tech profitable? Was the above mentioned scheme just a way to transfer the cash from CFHL to Jindal Power Tech?

3. Though the scheme seems to be withdrawn for now? What is the probability that it will be brought up again? If it is brought up will it be a good one for the stock or not (appears not)

4. Do the holding companies (as listed above) have any substantial liabilities? (How do I find this out?)

5. Are there any events that might trigger unlocking of value (Example: Selling of a stake in subsidiary company, appears highly unlikely?)

Given all this confusion about different stakes and demerger schemes, for now I just get the feeling that the price accorded by the market seems to be right. But note, thats my opinion for now and it may change depending upon answers to the above questions. Also I would want to calculate the amount of cash per share, and compare it against the current market price.

To be continued…

Is it always about “Value”?

Very interesting comments by Deepak Shenoy in his blog post about the possible impact of situation in Greece on the Indian markets:

Any complication WILL impact India. We are not delinked or “decoupled” in any way – the world has intricate networks that make money flow more important than pure value. In simple terms, it’s more important today to note how money sloshes around the world than to see if company X has great cash flow; eventually, a liquidity “event” has the potential to change all company fundamentals.

George Soros makes a similar point in his book “The Alchemy of Finance“. Money flow has the potential to impact the fundamentals of economy. So what we see as value in company may quickly vanish if the economic situations change. We should not ignore the broader market trends/economic situations when analyzing companies.

Categorization bias

I happen to come across this post about where in the world is Michael Burry on a blog inspired by Michael Burry’s value investing techniques.

One paragraph that caught my attention was about Categorization bias/Categorization bias. For example, as people tend towards stereotyping a lot. We tend think all South Indians wear lungis and eat curd rice, all gujjus are stingy and eat a lot of sweet, and all bongs  eat fish.

It may be true for a majority of people, but some people in that group do buck the trend. Stocks are similar, there will be stocks which are different than the rest of the group in some way, but in frenzy these differences tend to get ignored. Value Investing is not just about trying to find stocks that are selling cheap, but as investor you should be able to answer why is the market pricing it so low? Has the market done a mistake(example: classification bias)?

Here is a transcript of the paragraph:

Categorization Bias: People tend to put different things in different “baskets” and from time to time they put the wrong things in the wrong baskets. For example, if two groups are polled to give average temperatures over the past century for group 1: March 1 and March 11 and group 2: March 25 and April 5, the first group will give pretty similar answers for March 1 and 11, after all there’s just a 10 day difference between the two. But what is interesting is that the second group will give very different answers for March 25 and April 5, the latter date several degrees higher than the first. The reason is people link the idea of “April” to “Spring” and put it in that category. While “March” is still “Winter”. Silly, I know, but this happens all the time in the stock markets as well: Macquarie Group, and Australian bank lost almost 90% of its market capitalization during the crisis. Going from ~3x book value to ~0.6x book value just because it was an “investment bank”. Truth is, Macquarie was a very unusual investment bank with very limited exposure to mortgage-backed securities or eroding asset prices because it did not have any in its balance sheet (or any off-balance sheet hidden exposures for that matter). Well, not Macquarie is back up and outperformed Goldman Sachs, JP Morgan and all relevant financial industry indices during the past year. Check it here