Tuesday, May 11, 2010

Stocks on Sale - 30% Off

In this current age of Malls & Supermarkets,we must all be accustomed to buying things ranging from consumer electronics to apparel at discounts. But how would you react if i said that i could tell you a way to buy stocks of two well known  companies at around 30% discount. The companies i am talking about are Tata Motors & Pantaloon Retail. However the instruments i am talking about here are Differential Voting Rights(DVR) shares rather than ordinary shares.They differ from ordinary shares in that they have different voting rights(higher/lower) and higher/lower dividends accordingly. In short these are devised for minority shareholders as Promoters,FIIs & DIIs generally don't like loosing their voting rights. So as an example, Tata Motor's DVR shares carry 1/10th voting rights but a 5% extra dividend over ordinary shares. DVRs have been quite unpopular in India with only the above mentioned companies issuing them.Lets take a more closer look at these instruments and try figuring out if they offer some kind of price mismatch that can be taken advantage of.

In 2008, Tata Motors had issued 6.41 crore shares as a part of its plan to raise Rs4,145 crore through a rights issue for repaying the loan taken for funding the acquisition of luxury brands Jaguar and Land Rover. The DVR shares were listed on the stock exchanges in November 2008. The ordinary rights issue was priced at Rs340 a share, while the DVR shares were priced at Rs305 a share.Due to the downturn in the markets at that time,the issue was heavily under-subscribed. The promoters led by Tata Sons had to bail out the issue by picking up the large unsubscribed portion(84%). Much of the balance was held by IFCI Ltd. As a result, there was hardly any floating stock and hence liquidity was low. Due to the low float, the DVR shares traded at a premium for some time and it was until IFCI and Tata Motors’ promoters offloaded some of their stake to institutional investors between September and November 2009 that they started trading at a large discount to the ordinary shares. Tata Motors’ promoter group now owns 53% of the DVR shares, down from 84.3% at the end of June 2009.Perhaps it was the possibility of more sales by the promoters that was keeping prices depressed. After all, it doesn’t make sense for promoters to hold shares with lower voting rights. Further there was a lot of uncertainty regarding the future of DVRs after the SEBI amendment of listing agreement clause 28A on July 2, 2009.The amended clause had specifically barred companies from issuing "in any manner which may confer on any person, superior rights as to voting or dividends vis-…-vis the rights on equity shares that are already listed". It was more a coincidence that Tata Motors DVRs came under the fold of the amended law as it was meant for thwarting the practice of issuing equity instruments by certain entities with "special conditions" to private equity players taking advantage of the provisions in the Companies Act. Hence due to the liquidity concerns and SEBI amendment both DVRs of Tata Motors & Pantaloon were trading at discounts as high as 43% in the first week of march.However as the chart below shows ,notice how the gap between the Ordinary shares of Tata Motors(TTM)  has dropped to around 30% from more than 40% in two months.

This can mainly be attributed to SEBI's recent informal guidance on Tata Motors DVR shares which has removed the legal uncertainty over it and paved way for free market valuation. The informal guidance specific to Tata Motors is legally enforceable and not only has it underlined the legal validity of the company's DVRs, but also allowed it to issue fresh DVRs with same terms by way of bonus or rights, follow on public issue, preferential allotment and qualified institutional placements and issue of employee stock options convertible into DVRs.I believe this augurs well for the DVR shares and one can expect this gap to come down to at-least 10% as globally DVRs trade at a 5-10% discount to ordinary shares. The globally well known behemoth owned by Warren Buffett - Berkshire Hathaway(BRK)  also has DVRs & surprisingly they trade at a negligible premium to ordinary shares.So assuming that  a 10% discount is fair for the DVRs that still leaves an upside of about 28% at today's closing price of Tata Motors(814) & DVR(570).This is provided the stock price of Tata Motors stays flat & the DVR's price rises. If however the Stock price  of Tata Motors moves up & down which is very likely the returns could be higher or lower.

Currently the discount between the Ordinary & DVR shares is about 30% both in case of Tata Motors and Pantaloon Retail. Another way to look at this is its a chance to own both business at a price 30% lower.This means i can get Tata Motors for a P/E of about 14 instead of 20 by buying DVR and also earn a   5% extra dividend. This makes a great case if one is bullish on Tata Motors a company i feel is a little hard to analyze given its complexity, all-though a multiple of 14 doesn't look too expensive for a company of this size & reputation if the much hyped Auto boom is to come. The same logic applies to Pantaloon,however its one of those growth stocks i try to keep away from given its lofty valuations and i would do that even after a 30% discount. In short this could be a high risk bet with returns of around 30%+ if it works out which i feel is not bad at all at current market levels. This is my first attempt at special situations investing so i am sure i might have left overlooked some vital points and nitty-gritties. Please let me know what you all think, would love to have a discussion on this post.

Source of Idea : This article by Livemint  shared by Bikram .

Disclosure : Long DVR shares of Tata Motors & Pantaloon(tiny position) . I bought these in early march when the discount was about 43% .

Thursday, May 6, 2010

Update on IMPAL & Hidden Value

I analyzed India Motor Parts & Accessories (IMPAL) here a few weeks back. One of the visitors Chinmay who runs a wonderful blog here, made interesting comments on the unquoted Investments worth 18Crs on book of IMPAL that i had left out in the valuation but mentioned about in the post. Further IMPAL came out with strong Q4 numbers as expected and the stock rallied 20% on Friday but has now come back to earlier levels following the fall in the markets. Lets take a look at these 2 issues:

1. Hidden Value

IMPAL holds 1,80,19,231 shares of "Royal Sundaram Alliance Insurance Company"(RSAIC) valued at 18Crs in book. This comes to a stake of 8.58% in RSAIC which we can glean by looking at Sundaram Finance's Annual Report. Now Sundaram wants to exit the General Insurance business and is in talks with Reliance General Insurance : http://www.financialexpress.com/news/reliance-insurance-proposes-royal-sundaram-alliance-buy/606979/ . So if this deal goes through, Royal Sundaram Alliance will get 26%  stake in Reliance General Insurance.  Now Reliance General Insurance is not a listed company ,ence its valuation is unknown, however various reports that i found peg the value at around 3000 - 3500 Crs. This puts IMPAL share at around 66 - 77 Crs . I shall assume that Reliance General Insurance is conservatively valued at 2000Crs which adds about 45Crs to IMPAL's existing investment. So now the total investments in IMPAL's books are actually worth:

               88crs (Sundaram Finance + MFs + Cash) +  45crs(RSAIC) =   133 Crs or Rs 320/share

2. Latest Results Update 

IMPAL came out with Q4 results recently which also gave us the Profit & loss figures for FY 2009-10 . Though Q4 figures were lower than those of Q3(but well above Q1 & Q2) what i am more concerned is with the yearly results. Total Income was up 19.2 % but more importantly Net Profit was up 42% . So IMPAL managed to have another year of record profits after 2009. Now with the new figures  & the added value calculated above the valuation becomes even more attractive. The market is currently valuing IMPAL at 217crs(Rs 522) which comes to just 84 Crs excluding Investments. IMPAL made Net Profit of 24.67 Crs in 2010 bringing the P/E to  3.5 and P/BV to 1.82 which appears quite attractive. I am not quite sure how the next quarter or year will pan out for IMPAL but at the current valuations the downside seems to be well protected and i will let the upside take care of itself.

                "Heads I Win Big; Tails, I Don't Lose Much" - Mohnish Pabrai

Disclosure: Long IMPAL 

Saturday, May 1, 2010

What Am I Doing and Mr Market

Let me be frank, I don't like it when markets rise and when they are at higher levels in general. That too if you are not fully invested and the market rises it becomes increasingly hard to deploy capital. Though the gains in the holdings may excite most investors, i love falling markets as they give me a chance to buy good companies cheap. This doesn't mean i am a pessimist, i strongly believe that India has a bright future and so do the Markets and am long the market over the long term. However at the current market levels where the Sensex & Nifty are trading at P/Ex multiples of 20.7 & 22.3 respectively it becomes really hard to find undervalued stocks forget about bargains all together.It is in times like these that you look back and regret having not picked up stocks you liked only to see them double or treble. However one has to remember that the market always gives us opportunities to buy stocks cheap,only one has to have the patience to wait for the right time & pounce on it when it arrives. Warren Buffett often says that most of his time is spent doing nothing but waiting and reading behaving as though the market doesn't exist at all. As Ben Graham put it - The market is there to serve you & not to instruct you. His concept of Mr Market introduced in The Intelligent Investor sums it up beautifully.

Graham’s explanation goes something like this. Think of yourself as owning a share in a business with one of your partners, say Mr Market, who is somewhat of a neurotic who on any given day will offer to buy your share or sell you his at a specific price. His moods can fluctuate anywhere between incredible optimism and overwhelming depression. One day he will nominate a higher price to buy or sell, the next day he might increase it, lower it, or even appear uninterested in whether he buys or sells.The point that Graham makes is that Mr Market’s judgment is formed more by mood swings than by rational thought and that this gives the wise investor buying and selling opportunities. If Mr Market’s price is unreasonably high, then wise investors have the opportunity to sell. On the other hand, if it is unreasonably low, then they have the opportunity to buy.The important thing is that a successful and careful investor makes her or his own decision, based on their own ideas of the worth of the investment.

So i am waiting patiently and trying to study good businesses so that i am ready to cash in when the prices are attractive. I am also continuously trying to  find stocks offering value & available relatively cheaply. I am running various screens like Magic Formula,Cigar-butts(more on these later) to get on to some good stock. I shall analyze more stocks soon.