Investing

Here's the post I was talking about wherein I'd tell you about a company and it's major numbers
and you'd gotta tell me if it's a sound investment or not.

Firstly, let me tell you that there are 2 types of investments. One, value investments and two,
growth investments. Value investment is one wherein you buy a company which is worth 100
bucks, for 40-50 bucks and then wait for its value unlocking. The quality of business doesn't
matter much. In fact, in this case, business quality is almost always bad because it is only in bad
times or bad businesses that we get something for discount. It is a typical Benjamin Graham
school of thought. One, that Warren Buffett practiced in the initial years of his life and made his
first big money with. Growth investments are where you buy a company which is worth 100
bucks for 80-90-100 or even 120 bucks but you are focusing on the growth that in let's say 5
years, this company will be worth 200 bucks or more.

So, as you can see, that in case of value investing, a bad and pathetic company can be a
wonderful investment.

But in case of growth investing, it has to be a good and wonderful company because we are
betting on growth here.

But remember, valuation is very important in case of growth investment too because a wonderful
company can be a pathetic investment if bought at a wrong price. But in case of a growth
investment one doesn't have to buy too cheap with respect to company's worth.

Today's case study is from VALUE PERSPECTIVE. The case is one of a PATHETIC
COMPANY in terms of business, opportunities, policy environment but I'd like you guys to see
it from a VALUE perspective. THIS IS IN NO WAY A RECOMMENDATION. IT IS PURELY
AN ACADEMIC DISCUSSION OF A VALUE CASE.

But, before I do that, I'd insist that you must think like a businessman if you can, because true
investing is a business like thinking. Though you invest in few shares of the company but the
thought process must be as if you 're buying the entire company. That's what is taught by
Benjamin Graham, Warren Buffett or even Peter Lynch.

Now, let's talk about the case. Let's call the company ABC Ltd. (ABC).

1.) ABC is in the business of dye stuff intermediates. It has a small equity of 4,46,3000 or 4.46
Crores. Total number of issued shares are 44,46,300 with Rs 10 face value each. Out of this,
21,42,334 or 48% shares are owned by promoters and 23,03,966 or 52% is owned by non
promoters (which includes corporate bodies, foreign bodies and public). If I just segregate
public, then it is around 45% of the total number of shares. Total number of shareholders are
7054 as of now.
2.) If I see P&L of ABC of last 13 years from 2005 onwards, the company has incurred losses in
4 years including FY17. As in FY 2017, the company incurred a losses of nearly 1.82 Crores.
Losses are due to fluctuating sales and raw material costs. Other issue is Government's
intervention on pollution grounds. Sometimes the factory has been shut down as well for as long
as a quarter.

3.) As for sales. ABC's 5 year CAGR is around 10% and 3 year CAGR is around 23%. Sales is
very very fluctuating as well due to uncertain policy environment. Sales in FY2017 was 114
Crore.

4.) ROE wise, ABC's 10 year CAGR is 26%, 5 year CAGR is 33%, 3 year CAGR is around
29%. ROE is more due to low equity of 4.46 Crores.

5.) Now, comes the best part. ABC has 0 DEBT. It has 16 Crore debt in 2011 but cleared that off
to NIL by FY2017. The only big head on the liabilities side is Deferred Tax Liabilities of 1.5
Crores.

6.) As we can see that ABC company produced sales of 114 Cr in FY 2017, it shows that
working capital is managed well as equity is too small. Also to note that in FY2015, sales was
131 Crore and that too on the equity of 4.46 Crores, which shows that requirement of
incremental capital is not much. I mean in 2005, the company has nearly same capital, 4.45
Crores and produced sales of 37 Crores and in 2017, they did sales of 114 Crores with the same
capital thus incremental capital requirement is low which shows that working capital is managed
well.

7.) Now coming onto working capital structure of ABC. As of 31st March 2017, Current Assets
stood at 82 Crores while Current Liabilities stood at 49 Crores. This structure can also be judged
from "Changes in Working Capital." In FY 2017, Changes in Working Capital was a
NEGATIVE 5.6 Crores. For those who don't know, let me tell you that Changes in Working
Capital figure is negative when management invests heavily in Current Assets and decreases
Current Liabilities which I have just told above that Current Assets were 82 Crores while Current
Liabilities were 49 Crores. This management of working capital enables them to work on such a
small share capital of 4.46 Crores.

8.) Despite a loss of 1.82 Crores, ABC paid dividend from its free reserves which shows that
they expect the company to turn profitable. And since they expect it to turn profitable, they didn't
want to spoil the culture of paying dividend by not paying for one year on loss. Hence, they paid
the dividend even in a loss making year.

9.) The net tangible book value is around 45 Crores or in per share terms Rs 100 per share.
Further, the cash in hand is around 20 Crores. In terms of per share, the cash is around Rs 45 per
share.

10.) Now, let me also tell you an incident which happened in FY2013 between FY 2014. See, in
FY 2010, sales was 69 Crores, in 2011, sales was 73 Crores, in 2012, sales was 70 Crore. So, you
can see that average sales was around 70 Crores. But in 2013, sales dropped to 15 Crores on the
account that they had to close down production activities as per the directions of MPCB. In
August 2013, Share Price had made a low of Rs 3.60. Then in FY 2014, sales resumed back to
62 Crores as the factory was up and running again. The share price however made a high of Rs
193.85 in September 2014.

FINAL WORDS

So, here we have a company ABC, which has fluctuating sales, profits (currently in loss),
competitive industry, fluctuation in cost of raw material and intervention from Government
bodies, which makes it A BAD BUSINESS IN A BAD ENVIRONMENT. There are no growth
prospects whatsoever, at least not visible currently.

But, if we just go Benjamin Graham way and focus on numbers rather than the business then we
have a different story.

We have a company which has a small equity of just 4.46 Crores, 0 Debt long term or short-
term, Excess current assets over current liabilities, book value of Rs 100 per share and cash of Rs
45 per share.

WHAT IF I SAY THAT THE COMPANY IS AVAILABLE TO YOU AT 24.6 CRORES

(Market Capitalization) or in other words at Rs 55.50 per share.

See the thing. The company has a cash balance of around 20 Crores and it is available to you
almost at the same amount of 24.60 Crores. It means that the entire business, entire assets (land,
building and machinery) and everything else, you're getting for free. You are just paying for the
cash and 0 for anything else. You are not paying anything for business, growth prospects or
assets. That is why it does not matter to me that ABC is a bad business.

Over to You !!!

Company Name is : Shree Hari Chemical Exports :)