September 7, 2005

Kothari products ltd - A Net cash graham situation

I was running my screen in the year 2003 and came across kothari products. This was a company with 240 crs cash and equivalent (net of debt) on the balance sheet with a market cap of 80 crs ( i think they had 40 mn outstanding shares @ 170 rs / share). They currently have almost 300 crs (around 600 rs per share )

They were fairly profitable (although the profits were down). The market had beaten down the price due to legislation issues (The maharashtra government had banned Pan masala / gutka - their main products). The company was still profitable, although the profits had come down due to drop in sales. Its free cash flow is same as its net profit because Gutka and other tobacco products require little capex for plant and machinery or working capital. The main asset is the brand (in this case pan parag ). So their profits were pure cash for the owners

I bought the share at an price of Rs 160 – 170 a share and sold around 260 per share. The reason I sold was lack of information from the company ( their website is poorly updated in terms of financial results). In addition, I was not sure what the promoters were planning to do with the cash ( the promoters hold almost 70 % of the company).

So what’s the point of the whole thing …Its not that it was a profitable investment. Rather, although I made money on the whole thing, I did not have a very comfortable feeling with the investment. If I compare it with the other purchases I have done such as asian paints, or a concor which are good businesses with good management, this one made me uncomfortable as there was no transparency from the company. In the end I decided to get out rather than face an unpleasant surprise from the management.

My investment philosophy is closer to that of buffet where I end up buying good to great companies at fair prices and get a good night’s sleep. The above was an experiment in a graham style investment. It was profitable and based on a sound approach. But somehow requires more diversification and purchase in not so great enterprises.

Do you have a similar experience? please feel free to share with me


pey said...

My story is worse!

I purchased 50K worth during 13-14Jun05 when the price was at 330!. Even then, the share had a compelling story with the book weighing in at 500 rupees; Mcap = 50% of cash holding(!); negatives that you list were factored in etc.

Although I was fully cognizant of the fact that the category itself was losing favour, but the numbers were very compelling indeed.

Then came the news that the company intended to delist and I hopped off losing 1.5K! Well, I did not lose my shirt, but definitely my collar was gone.

And now the scrip is trading at 415. Could have still made 30%, but you're right - I jumped and decided to cut my losses since I did not trust the management.

Rohit said...

I would do the same thing in a similar position.
Also such kind of incidents have happened not only with the mid cap and small cap companies, but more so with the bluechip MNC's in 2003-2004 bear market. ex : Colgate palmolive, Castrol etc
The typical modus operandi was to use the poor operating performance (intentional ??) and corresponding low stock price to take the company private at a low price cheating the minority indian shareholder

Minority Investor said...

Protecting minority investor interest is an issue at the forefront of developing and maintaining a healthy retail investor base in the country. If the capital markets are to grow a lot still needs to done to protect the rights of the minority investors or they will feel slighted and just abandon the capital markets.

As it stands today, the majority of household savings in India are with the banking sector and not in the form of risk capital such as equity. There is a definite under investment in equity. And for good reasons it seems. Currently, minority investors have all the downside of investing in equity with none of the commensurate upside due to the dubious financial practices of even well know promoter groups.

Please visit to keep abreast of the latest issues facing minority investors in the Indian equity market.