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 part 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 sandhesh – 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.

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