March 23, 2011

Some companies of interest

I have a preliminary list of companies, which I am looking at more closely now. These companies have passed the 5 min smell test (nothing obvious to reject these companies), but now require a more detailed analysis to make a decision.

I am listing two such ideas below. I do not hold any of the companies as of today and may not buy the stock if the company is not good enough for any specific reason

Geojit BNP Paribas
This is a financial services company – providing stock broking, portfolio management and other distribution services. The company has over 5 lac clients and now over 500 offices across the country.

I personally, use their brokerage service and have found to them to be on par with the other brokerage services. I am not pitching their service to you – I don’t have any financial relationship with them – just a customer as anyone else.

The company’s business is tied to the fortunes of the stock market and is very volatile. The company has grown its revenue from 80 odd crores to around 250 cr +. The net profit has grown from 18 Crs to around 50 Crs in 2010. This growth however has not been a smooth upward trend. As expected, 2009 which saw a severe bear market, saw a drop of 20% in revenue and 80%+ drop in net profits.

In spite of the volatility, the company has been doing well by expanding the client base and offices. The company is now selling at a very attractive valuation of less than 10 times earnings (with 30% of the market cap in the form of cash). In addition the company is also expanding in the gulf countries through various Joint ventures

Finally a key point – Rakesh jhunjhunwala is a director and a majority shareholder in the company. That in itself, does not mean that we should close our eyes and buy the stock. However, the company is definitely worth a closer look

Caution – If you look at the price history, you will realize that the company has dropped in price in the last 6 months. Now if that excites you, welcome to my world. A stock which has dropped in price in the recent past is good place for me to start investigating – does not mean I will buy the stock, but will definitely start analyzing it.

Deccan chronicles
This is a very interesting idea. It is a company which is way out of my comfort zone – It’s a publishing company which has also invested in an IPL franchise.

The reason I got interested is that the entire company is selling for 1600 Crs and a sum of parts value is around 4000 Crs (caution – this is just a back of the envelope calculation)

Let’s look at the various parts -

Deccan chronicle news papers
Supposedly, one of the leading papers in the south (based on the numbers provided by the company – 13.8 lakh readers in 2009 up from 4 lakh readers in 2005).

The newspaper business is generally a very profitable business and has great economies of scale – the marginal cost of adding a subscriber is fairly low and the contribution to the profit from each additional subscriber is fairly high.

This business made around 260 Crs in 2010 and can conservatively be valued for 3000 Crs.

IPL team – Deccan chargers
The other business, if you can call it that, is the IPL team – Deccan chargers. This business is barely profitable, but the latest auctions have netted around 350 Million dollars – which comes to around 1500 Crs and change.

Now, this valuation can be debated (depending on one’s point of view and whether India progresses in the world cup :)) – but let’s value this at 50% of the above auction price for the time being – 750 Crs

Beyond, the above two above business, there are some smaller business which I will ignore for the time being.

Total value
So the total asset value is around 4000 Crs and the debt of around 600 odd crores is offset by the cash on the books. Also, I will not worry about the debt as the newspaper business is pouring cash.

So the company is selling at less than 40% of asset value. In addition, the company has also announced a buyback of almost 270 Crs, which at current prices will reduce the share count by another 15%.

What am I still waiting for ?

So why I have not sold my dog, my car and my cow (ok, I don’t have a cow :) ) and bought this stock. There are a few things which give me a pause.

- I have to make up mind about the management. Is the management like other publishing companies like sandesh – using the cash flow from a superb business (publishing) in all kinds of ventures or are they astute capital allocators? Market will value this company at the appropriate valuations only if the management allocates the cash flow from the core business into attractive areas

- What is a publishing company doing in the sports franchise business?

Anyway, if something is too good to be true, it usually is. I am still trying to look closely at the company to see what I am missing here

As always, please do your research before you buy the above stocks. I am not recommending these stocks and have no interest in doing so.

18 comments:

Raja said...

Hi Rohit,

I have a doubt with regard to this statement of yours:

"but the latest auctions have netted around 350 Million dollars – which comes to around 1500 Crs and change"

Are you talking about IPL player auctions for 2011?
But that cost them only $6875000 (6.8 million dollars) check the link http://iplschedule.in/ipl-player-auction/14. I cross checked the info present in this site from few other sites too.

So, 2 things here:
1. Even if the figures given by you are not matching with the one mentioned by this site and we both are referring to IPL player auction prices. Supposing one of the price is right, are we considering the price paid by the franchise for acquiring this team for valuation here ? That sounds li'l wrong, isn't it ? I mean the franchise has to really do a lot to get back it's invested money including the promos, selling merchandise, share of ticket sales (including selling the players cow, dog etc etc..) to get a return on it's investment. So, how can we consider the investment in raw material (read buying players) for valuing this business?

2. Supposing the 350 million you are referring to is something else like returns the company is assured of making for this season. Then this statement "This business is barely profitable" is hardly true.

Looks like this statement is very apt here "Anyway, if something is too good to be true, it usually is"

Regards
Raja

Ansh said...

Rohit

Why do you prefer Jeojit over Indiabulls Securities or India Infoline? Both these companies have a good retail base and are also expanding their branches.

Rohit Chauhan said...

Hi raja
the 1500 Crs number is the price paid by new investors to buy an IPL team.
So lets say i was a billonarie (i am daydreaming) , i will have to spend 1500 crs to buy a new IPL team.
Its not the amount to buy players or to run the team - thats just the price to buy the team as a whole. then you have to spend money to run the team

now deccan chargers is barely profitable - made 1.6 crs in 2009 and lost 40 crs in 2010..so valuation is anyone's guess

rgds
rohit

Rohit Chauhan said...

Hi ansh
no preference ..just started analysing and will make a decision.

not comfortable with indiabulls ..too complicated company ..into all kinds of businesses

rgds
rohit

Lucky said...

Hi Rohit,

Did you notice that all of the reported profit for Geojit came from "Other Income" in 2008-09? The latter has also increased to a much higher proportion of the operating profit.

This is not a good observation and one needs to go through the AR minutely.

Overall, the profit variability is too high to be comfortable with.

Regards
-Lucky

Rohit Chauhan said...

Hi lucky
yes, i am aware of that. the other income was profit from sale of the commodity brokerage business.
thats why i have noted that its a volatile business. when the stock market crashes, the trading volumes and income dries up and as costs are quite fixed, the net profit drops too.

but that is the nature of the business ..nothing wrong with that

rgds
rohit

Shreyas said...

Hi Rohith,
Had you had a chance to look at Financial Technologies? Trading at Market Cap of 3500 Cr with reserves around 2000 Cr. EPS is around 30Rs excluding other income.

Regards,
Shreyas

vandude said...

Hi Rohit,

Does the recent buyback signal that management think their share price is undervalued by the market.

Also market might be pricing in the telengana issue on ad revenues of DHCL. Do you see any impact of this? Or this could be offset by launching in new cities.

Is this a debt bargain?

Bhushan said...

It seems you are bit late. I got into Deccan Chroni when it came down.Well I bt 3000 shares@57/Share.It looks good by the way looking at the industry as well the way its priced at these level compared to DB or any other media n entertainment company.All in all it was a fundamentally good stock with good dividens though it has bit debt its acceptable considering the sort of business and I waited almost 2-3 months for the right price and right time!.Now its time for me to book profits! 42% gain in 3 weeks.

Geojit I found that stock today , looks like bit undervalued. Still the stock is in my analysys lab.May take bit more time to get the result as there are so many listed companies in that space. As such it seems good.I was looking around for some info on this stock thats how I got into your blog. Pretty nice and neatly written blog. Keep posting about good value stocks!
Cheers!

barney stinson said...

hi rohit,
please have a look at venkys and adf foods.They sure look great bets in this era of inflation.hopefully they will not turn out to be temptation foods (which by the way is starting to seem @ rs14 quite cheap even after considering the extreme mis- "managers" who are running the company)
maybe have a look at ceejay finance ( quite stagnant bottom and topline but cheap when compared to p/b , p/e and dividend yield of 8.4% ) and priya i.e 2nd rate businesses at fourth rate prices....what you thinks?....lol
p.s congrats on crossing the 2000 readers mark...i think this is the first indian value blog to have reached it...keep up the good work

Rohit Chauhan said...

hi shreyas
no i have not looked at financial technologies ...will do so

rgds
rohit

Rohit Chauhan said...

hi vandude
what is the telagana issue ?

on the buyback - the signal is usually that the stock is undervalued and the management thinks that the value is more ...however that is not always the case. sometimes the only reason is for the management to increase their stake without putting in the cash.

i dont see the company as a debt bargain either

rgds
rohit

Rohit Chauhan said...

hi bhushan
congrats on your pick. In my case, i am not late or missed the boat ..i have not even reached the boat :)

i just analysing the company which takes me weeks and if i find it attractive, then i will make a decision.

geojit is also in a very initial stage. i am looking at the entire brokerage industry now

rgds
rohit

Rohit Chauhan said...

hi barney
i have a lot of purchases of 2nd rate business at fourth rate prices and made lousy returns from it ..so now i prefer 1st rate biz at second rate prices ..better late than never
some companies like temptation foods ...i think i will never touch no matter how cheap they get

rgds
rohit

vandude said...

Hi Rohit,

Telengana Issue - The issue of division of state of Andhra Pradesh where Deccan Chronicle has 61% readership.

Have you analyzed Piramal Healthcare.. Selling less than cash on hand. Prof Bakshi, in his blog wrote that it is a cash bargain. Is it really or is it another Cigar butt type of stock which Buffet talks about.

vinayak said...

Dear Rohit

prof Bakshi has written an article about Piramal Healthcare as biggest cash bargain & value pick on the site 'fundoo professor'. Your views please.

Regards

vinayak

Raja said...

Came across this news piece recently. Looks like the IPL's franchises pay only 1/10th of the license fee in a year. http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/business-lessons-from-ipl-franchise-model-is-risk-free/articleshow/7930446.cms

VIKAS KUKS said...

Hi rohit,
Regarding geojit BNP paribas, the results for 2011 year came today and are a bit negative. Just comparing another broking firm indiabulls securities, I felt indiabulls securities to be a bit attractive in terms of valuations. For current year their projected PAT is 53 crs approx. on a market cap of 400 crs. Also they have 23% cash holdings as market cap. They gave a 10% dividend yield for 2011 at current price which is good. It is also precisly into brokerage business as they have already seperated other businesses. Just have a look at their financials and your comments on their valuations.

Regards
Vikas