There is an interesting discussion going on the blog of Sanjay Bakshi – an authority on Value Investing and Thinking.
This is the link – http://fundooprofessor.wordpress.com/2013/09/25/a-killer-puzzle/
My Comments on the stock as below.
First of all a big thanks to Sanjay Bakshi to taking the BF BV discussions to the online forum and educating a lot of novices like us.
Just my few thoughts
Although in the above case fundamentally everything looks sound and can continue to remain sound forever.
But in this case one needs to realize will you buy this company if it was not listed in the markets and the promoter comes to you with this valuations with no exit clause in it ? ( Another such company from Nalanda is Triveni Turbines with a similar case in point of concentrated shareholding )
Why is the company listed in the first place is difficult for me to understand.
Looking at the annual report there is one area which I generally look at no fundamental analyst cares about it. Maybe everyone likes to follow the Buffet adage -I buy on the assumption that they could close the market the next day and not reopen it for five years
The area is Distribution of Shareholding.
94.93% of the shareholding is with 46 shareholders who hold more than 1 lakh shares.
1.49% of the shareholding is with 26 shareholders who hold more than 50k shares.
1.46% of the shareholding is with 4000 shareholders who hold 1-5000 shares. ( Retail Shareholders )
So basically that gives me an average of 40-50 shares per shareholder in the retail segment. This implies whatever the holding is left is staggered and some might be the same from IPO times.
Over the last 5-7 years many funds, FIIs have changed hands in the counter. The last change of hands happened when the stock fell from 850 to 600 odd rs and some holders like finquest, emerging india focus and dsp black rock sold the stake which was added by malabar and kotak i suppose. ( This was a nice correction before the deal happened )
Apart from the 96.5% there might be few more shareholders who would be value investors or insiders. This basically leaves me with 3% of equity left for trading.
So for a 1000 cr market cap company the floating stock which can be traded is around 3.5-4 lakh shares and a total value of 30 crores on a ball park figure can be a little more or less. The daily traded quantity on both exchanges is generally a couple of thousand shares.
So which investors will get interested into this stock ? Fundoo Professor, Warren Buffet who can keep it for 10 years.
How does one valuate an unlisted company without an exit clause is a case which we need to look for in this scenario.
So how will the price of the company rise when it is dependent on 4000 people with 40 odd shares with them.
Does the promoter want to scale up the business by growing huge no of franchisees ? or buyout other brands? Will he raise more capital ? Monetize his stake and give it to some operators to jack up the price ? Is he happy with the dividends and salary coming to his pockets?
( Were these questions the same in 2009/2010 was at 100-200 rs. This is what every new investor needs to ask)
So how do you value a company which is essentially not listed and you donot know the promoters on a personal basis ?
How to value an unlisted company ?
My only answer in such a case is dividends and nothing else. Minority shareholders have generally no right on how cash is used but dividends is one way the promoter feeds himself every year.
So the question here is not how good Kewal Kiran will do but its just two questions.
->Are you Warrent Buffet ?
I buy on the assumption that they could close the market the next day and not reopen it for five years
– Will the dividends grow up so fast that the yield will make a lot of yield investors lap up the stock.
P.S – I have not seen the fundamentals of the company and neither am i interested in this one till the day promoter decides - to raise more equity or a fund sells the stock in open market or the dividend policy increases in a big way or plans to delist from the exchanges. But am going to definitely track this one along with triveni turbines, elgi equipments.