September 18, 2007

Hidden value – Kirloskar oil engines – Report card

I posted on Kirloskar oil engines in oct 2006. I had noted that the company has investment holding in other group companies and JV’s of around Rs 95/ share. My own intrinsic value calculations were in the range of 320-350 Rs/ share. So how did the stock fare?

My personal history with the stock is below. I started investing in the June-july time frame and had an average cost of around 182 Rs/share. I sold at an average price of around 315/ share resulting in an annualized gain of around 75%.
So was it a smart pick ? more of that later. First I bought in june at an average price of around Rs 182/ share and price shot to around 300 by Nov time frame. Had I liquidated then, my annualized gain would be around 125%. Is this hindsight bias? I don’t think so. Let me explain – My approach has generally been buy and hold. The original thesis for this stock was that the company was selling below intrinsic value due to investment holdings and once it approached intrinsic value, I would sell it around 90-100% of the intrinsic value. However old habit die hard. I continued to hold on to the stock due to my muddled thinking.

I later read mohnish pabrai’s book – Dhando investor and also read some lectures by professor bakshi and have expanded my investment approach to buy and hold and to graham type stocks (which I sell once they reach 90-95% of intrinsic value). So the next time around when the stock approached my estimates of intrinsic value, I offloaded it completely this time.

Coming back to the issue of whether it was smart pick. The company is trading around intrinsic value, so it is tempting to claim that I was right. Frankly I am not sure. I also agree with prof bakshi’s comment in his interview that if the corporate structure is flawed, wherein the hidden value will not be unlocked, then such ideas are value traps. I have seen several such stocks where the investments in group companies makes them look undervalued. However I am wary of investing heavily in such stocks.

Final note: I did my personal analysis in june-july and posted it in oct 2006. So please do not blindly follow my suggestions when I publish them. I would suggest that you should do as I do on such stock analysis by bloggers. There are a number of like minded bloggers I read regularly. Whenever they discuss a stock, I make it a point to analyse it myself. I may not agree with the analysis eventually, but I know for sure that blogger has done some analysis and if it has passed his screens, it is definitely worth looking at closely.


Value Architects said...

Its a crazy thought to take refuge under a hidden asset, unless taking a activist position to unlock it. The very idea of hidding such value by the promotor is NOT to share it.

I think Marty Whitman said something like, "a bargain which remains a bargin, is not a bargain" (conservative aggressive investor)

Not that unlocking doesnt happen - but it happens too often too late. Just like Tata investments - which has always remained a undervalued closed ended fund. Now the pros are making little marketmen happy by giving them a piece of cake. Rejoice!

Rohit Chauhan said...

i agree with your point that there has to be catalyst to unlock the value. in most companies, these assets are promoter cross holding which would never be liquidated. so there is essentially no catalyst at all.
however the above maynot be the case if the investments are cash or equivalents or non group companies.
by same token undervalued land has also been used to justify higher valuations for several companies like SBI etc

Anonymous said...

hi all

cud sum1 explain "these assets are promoter cross holding which would never be liquidated. so there is essentially no catalyst at all."

i am guessing aftek or geodesic might be one such scenario rite?

Rohit Chauhan said...

lets take a hypothetical example. lets say a promoter - mr rich controls 3 companies and one holding company. mr rich owns 51% in holding company and owns 10% each in the other companies (A,B and C). the holding company in turn has a 30% holding in each company A,B,and C. B hold another 20% in A and C and so on
so here the promoter has created a pyramid structure. he personally holds only 10% in A,B and C but via holding company and due to cross holding he is able to control the other companies A,B and C
these holding are created so that promoters can control companies without investing substantially in those companies. as a result these indirect and cross holding will never be liquidated, or else the promoter could lose the control of these companies

Value Architects said...

Not necessary.
Even in case of non-pro group cos or cash or land - its not essential that value would be realised - or assets should be valued fully.

For ex - bharat seats (Relans enjoying fiefdom and sitting on useless non-pro investments, massive land) or Orient Paper (unwilling to sell off investment in competing birla-bro co like Century worth 130c, while at the same time raising 160c on rights!) or Japs like India Nippon or Denso, always foolishly hoarding cash!

The sbi land story is nothing but crap. Some fools sitting in HK offices also started talking about infosys - from land angle in 2006 - when having land was the paramount thing on earth!

As barton biggs said, we should always be in quest for the investment truth ;)


sharad said...

Regarding investment value of holdings esp ones where they are strategic like promoter holding through the company one area which most people miss out is regarding cross holding and net value of investment. If the promoter ownership is through cross holding it will be stupid to assume value will be unlocked. Suppose company A owns shares company B and B owns shares in A then the value of investment book should be mcap of A's holding in B minus B's holding in A so that the impact of promoter not diluting his stake is captured. Also we have to assume the impact of capital gains if any. Finolex cable/finolex ind. is another case in point.

What I have found useful in valuing these investments is assuming that the value will never be unlocked but I consider the PV of the possible dividend payouts (A DDM could help). In Finolex Cable./Finolex Ind, example I found this this becomes sizeable as Fin Ind. is good dividend paying company.

Comments invited

Rajendran said...

I saw you asking Prof.Bakshi to share his class notes. I have his class notes for 2001 .I got from Shankar Nath with Prof.Bakshi's permission. His only concern is the material should not be put in the internet. If you want , I can e-mail what I have . Please let me know your e-mail id


Rohit Chauhan said...

Hi rajendran
thanks a lot for the offer. can you email the notes to I got a set from shankar nath, but i am not sure if they are the same.

is there someway we can get the notes for the current year or previous few years from ex-student, ofcourse with due permission from prof bakshi


ashish said...

Please send the notes to me as well at

ashish said...

Thanks in advance :-)

venkat said...

Hi rajendran,

can you please send me a copy of the set to