Archive for the ‘Rejected investment ideas’ Category.

 

Aftek infosys appeared on my stock screens a few days back. I also had a comment from prem sagar on the company. The company seems to be extremely undervalued. It seems to have almost 400 Crs of cash on the books with a market cap of just around 650-700 Crs. With the last year profits of 98 crs, the company seems to be selling at a PE of 2-3.

On the face of it the company seems to be an investors wish come true. My initial scan showed nothing wrong, so I decided to dig deeper and came up with a can of worms.

– the company’s management was penalized by SEBI for participating with Ketan parekh in various behind the scene deals during the 2000 bull market (see here)

– The company had an investment of almost 46 Crs in a company called Arexera. They have accquired this company this year (the balance portion) for a sum of 56 crs. One would consider this accquisition to be significant. The positives of the acquisition are mentioned all over the report. However the valuation of the deal is not mentioned. The company had a net profit of 1 Crs last year (see page 100 of the annual report). The company was acquired at a valuation of 100 Crs ( PE = 100 !!!). The management has not discussed the valuation anywhere in the report and why they paid so much for it.
Finally surprise , surprise – this company was accquired from the promoters !!! . See the cash flow statement on page 83. There is an entry for 54.8 Crs which was paid to promoters to acquire this company. So the management accquires this company and has a related party transaction and does not mention this in the complete report??

– The company has issued 3.96 lac warrants to the promoters. They have received 10% of the price now and the rest can paid by the promoters within 18 months. Why have these warrants been issued if the company is swimming in cash, had some FCCB still open and is making almost 100 Crs per year ?

– Promoter holding is only 12%.

– FCCB issue in the last few years to raise capital. This capital is being used to accquire companies like Arexera from promoters.

The stock may do well (had a jump of 10 % recently). However I have bad feel of the whole thing. All the red flags I have pointed above don’t give me any confidence in the management. I still think the business will do well and the company should make money. But I am not sure if the shareholders will benefit or the promoters would. Their past and current actions don’t give me any confidence. I am definitely giving the stock a pass although there could be some trading gains to be made.

 
 

Tube investments is an idea which passed through my initial filter. I initiated the next step of analysing the company’s annual report. The analysis summary is below

Summary

The company has several businesses such as cycles, precision steel tubes and other tube products, chains, metal forming and financial services.
The company has had good return on capital of 20%+. It has a net margin of 5-6% . Its debt equity ratio has been between 0.4 to 0.6. The company has shown low growth with the topline increasing by 50% in the last 5 years. The net profit has tripled in that period (net of one time gain on investments)
The company has a net investment on the balance sheet of 500 Cr (net of debt). If I knock off the investment value of 28 Rs per share, then the valuation comes to around 5 PE based on the current market price. The stock seems to be a compelling buy.

Reason for rejection

On analysing the consolidated balance sheet, I discovered that the company has an additional debt of 500 Crs on its books due to a JV. The company has converted Cholamandalam investment and finance co. (CIFCL) into a JV with DBS bank. As a result the JV debts is now on the books. The company has however not provided any details further on this event. I think the event is important enough for the company to provide more details and give an assesment on the risks.

The above reason may seem small, but the debt and corresponding risk changes the profile of the company. The D/E ratio is now 1.3:1 and the company has not even provided enough details of the new JV. As a result I have decided to give the company a pass for the time being.

 
 

I generally run screens once a week and try to filter out companies with low PE (<15),> 12). Using this list as a starting point, I generally do a quick analysis of the balance sheet, P&L account and the financial ratios.

Companies which check out, move into the ‘further analysis’ pile. The rest landup in two further piles. One pile consists of companies which are fundamentally weak and not worth investing at any price. The other pile is of companies which are good, but not at the right valuation. I park these companies in a separate list and review this list once in a while to check if the price is within my valuation target.

Going forward, I would posting on the rejected companies so that I can refer back to these companies, to analyse if I was incorrect in rejecting these companies in the first place.

One deep value idea which I am looking at is ‘cheviot company’ In addition the following companies are on my watch list

tube investments
India Nippon Electricals
teledata infomatics
revathi CP
novartis
MRO-TEK
EID Parry (India) Ltd.
Investment and Precision Casting
Mothersons
rane(madras)

I would be posting an analysis of the above companies on my blog soon.