Cases in Value Investing

Transcription

Cases in Value Investing
CASE ON NOIDA TOLL
NOIDA TOLL PITCH DOC
OTHER MATERIAL ON NOIDA TOLL
WHAT THEY PROJECTED
AND HAD CONFIDENCE IN
WHAT DO YOU DO WHEN YOU ARE CONFIDENT?
WELL, YOU USE LEVERAGE!
FROM 2002-03 ANNUAL REPORT
POST DILUTION HOW MUCH OF THE EQUITY IS
STILL OWNED BY THE ORIGINAL INVESTORS?
FOR DETAILS OF CORPORATE
DEBT RESTRUCTURING SEE PDF
FILE EXTRACTED FROM AIM
PROSPECTUS
SHEOLI PARGAL’S FINDINGS
“CONCESSION FOR THE DELHI NOIDA BRIDGE” BY
SHEOLI PARGAL
AUGUST 2007
LINK: HTTP://INFRASTRUCTURE.GOV.IN/PDF/NOIDA.PDF
VIRTUOUS FOR EQUITY!
THANK YOU
“IF YOU DANCE TOO NEAR
A GRAVE, MAKE SURE
YOU DON’T FALL INTO IT!”SAM ZELL, GRAVE
DANCER
GRAVE DANCING
OLD CASE ON JVSL
Business Valuation
JVSL-JISCO Case
Turnarounds
“Many of the security analysts are handicapped by a flaw in their basic
approach to the problem of stock selection. They seek the industries with the
best prospects of growth, and the companies in these industries with the best
management and other advantages. The implication is that they will buy into
such industries and such companies, however high, and they will avoid less
promising industries and companies no matter how low the price of their
shares. This would be the correct picture if the earnings of the good
companies were sure to grow at a rapid rate indefinitely in the future, for then
in theory their value would be infinite. And if the less promising companies
were headed for extinction, with no salvage, te analysts would be right to
consider then unattractive at any price.
The truth about our corporate ventures is quite otherwise. Extremely few
companies have been able to show a high rate of un-interrupted growth for
long periods of time. Remarkably few, also of the larger companies suffer
ultimate extinction. For most, their history is one of vicissitudes, of ups and
downs, of change in their relative standing. In some the variations “from rags
to riches” and back have been repeated on almost a cyclical basis- the phrase
used to be a standard one applied to the steel industry- for others spectacular
changes have been identified with deterioration or improvement of
management.”- Ben Graham in The Intelligent Investor.
Turnarounds
“Many shall be restored that are now
fallen and many shall fall that are now
in honor.” – Ben Graham quoting
Horace
Turnarounds
• Three most common turnaround
situations:
– New management
– Injection of new capital
– The passage of time (cyclical stocks)
• Other situations:
– Debt-restructuring
• Cyclical rebound + debt restructuring =
multibagger.
Financial Surgery
Case on JVSL
Case on JVSL
Case on JVSL
Case on JVSL
Case on JVSL
Case on JVSL
Analysis of JISCO-JVSL Deal
•
Key differences:
1. JVSL is a much larger
company than JISCO
2. JVSL had a weak balance
sheet for many years
(now improving), while
JISCO has a strong
balance sheet.
3. JVSL has large
accumulated losses, pays
no taxes, or dividends,
while JISCO is profitable,
and pays substantial
taxes and dividends.
• Key Issues:
– How many shares will the combined entity have?
– What percentage of the combined entity will be owned by
the shareholders of each companies?
– What are the sources of value creation in this transaction?
– Is this really “value creation”, or “value transfer”?
– What is the logic of demerging the investments of JISCO to
a separate company?
– What is the logic behind merging the steel business of
JISCO into JVSL and then renaming the combined entity as
JISCO?
– What will be the fundamentals of the combined entity, post
merger?
Details of the transaction
JVSL: Status as on 31 March 2003
# of equity shares
129.1 crore shares of Rs 10 each
# of preference shares
Nil
Debt
Rs 5,483.76 cr.
• Under CDR, Rs 279 cr. of debt is to be converted
into 10% cumulative redeemable preference
shares.
– This was done in July 2003.
• So the debt stands reduced by Rs 279 cr. and
preference share capital stands at Rs 279 cr.
• Preparing JVSL
– Step # 1: Convert 40% of paid up equity capital into preference
shares (CRPS):
• Paid up capital will fall from Rs 1,291 cr. to Rs 775 cr.
• Preference share capital will rise by Rs 516 cr., but only
temporarily, because the preference shares so allotted will be
converted back into equity in step # 2
– Step # 2: Convert CRPS back into equity:
• Allotment of 1 equity share for every 4 CRPS.
• Preference share capital will fall by Rs 516 cr. and paid up equity
capital will rise by Rs 129 cr.
• Now paid up equity capital stands at Rs 904 cr.
• Net effect of Step # 1 and 2 is that paid up equity
capital will fall by 30% from Rs 1,291 cr. to Rs 904 cr.
• Preparing JVSL
– Step # 3: Conversion of debt into equity under CDR:
• Rs 457 cr. debt converted into equity at par.
• Debt falls by another Rs 457 cr., and paid-up equity capital rises
by Rs 457 cr. to become Rs 1,361 cr.
– Step # 4: Allot warrants to pre Step # 1 shareholders:
•
•
•
•
Ratio: 1 warrant for every 7 shares
Exercise price: Rs 10 per share before 2006.
Total number of warrants to be issued: 18.4 crore. (129.1/7)
If all warrants are exercised, then:
– Paid up capital rises by Rs 184 cr.
– Proceeds to be used to retire debt, so debt will fall by Rs 184 cr.
• Post-warrants conversion, paid-up capital becomes Rs 1,545 cr.
• Preparing JVSL
– Step # 5: Capital reduction:
• No of fully diluted shares at this stage = 154.5 crore shares of Rs
10 each.
• Face value reduced by Rs 9.375 to only Rs 0.625 per share (1/16
or original value). Paid up capital becomes 97 cr. i.e. 154.5 crore
shares of Rs 0.625 each.
• Immediately after this, the face value is increased back to Rs 10.
– Now the paid up capital becomes Rs 97 cr. consisting of 9.7 crore
shares of Rs 10 each.
– Net effect of transition from Step # 4 to Step # 5 is that fully
diluted paid up equity capital will reduce from Rs 1,545 cr.
to Rs 97 cr.
• However, since step # 5 will be effected before step #
4, the two steps have been restated.
• Preparing JVSL
– Step # 4 restated: Capital reduction
• At the end of step 3, paid up equity capital was Rs 1,361 cr.
• This is reduced to 1/16, i.e. Rs 85 cr. i.e. 8.5 cr. shares of Rs 10 each.
– Step # 5 restated: Allot warrants to pre Step # 1 shareholders:
•
•
•
•
Ratio: 1 warrant for every 7 shares
Exercise price: Rs 10 per share before 2006.
Total number of warrants to be issued: 18.4 crore. (129.1/7)
However, since capital reduction has taken place, the number of
warrants will be reduced to 1/16th of the original quantity and the
exercise price will be multiplied by 16.
– Revised number of warrants to be issued: 1.15 cr.
– Revised exercise price = Rs 160 per share.
• If all warrants are exercised, then:
– Paid up capital rises by Rs 184 cr.
– Proceeds to be used to retire debt, so debt will fall by Rs 184 cr.
– Post capital reduction and warrants conversion, paid-up capital
becomes Rs 97 cr. consisting of 9.7 cr. shares of Rs 10 each.
JISCO: Status as on 31 March 2004
# of equity shares
4.4 crore shares of Rs 10 each
# of preference shares
Nil
Debt
Rs 678 cr.
• Preparing JISCO
– Step # A: Demerger of Investments
• Jisco holds a 28.4% stake in JVSL.
• This, as well as other investments, having a book value
of Rs 550 cr. On 31 March 2003, are to be transferred to
InvestCo.
• Shareholders of Jisco will receive 1 equity share in
InvestCo for every 4 shares in Jisco.
– Since Jisco has 4.4 crore shares, InvesCo will allot 1.1 cr.
Shares to Jisco shareholders.
– What is the logic behind this demerger?
• Answer: think about what would have happened if
JISCO was merged into JVSL without going through with
the demerger.
•
Step # B: Merger into JVSL:
– By now JVSL’s paid up equity capital will be Rs 85 cr. i.e.
8.5 cr. shares of Rs 10 each. (before allotment of warrants
to JVSL’s original shareholders)
– And, JISCO has 4.4 cr. equity shares (post demerger.
JISCO’s paid-up capital will not change).
– Now, JISCO (after the demerger of investment) will merge
into JVSL in the ratio of 1:1.
– Therefore, JVSL will now have 12.9 cr. shares (before
allotment of warrants) of Rs 10 each, out of which:
1. 8.5 cr. (65%). shares will belong to its shareholders; and
2. 4.4 cr. (35%) shares will belong to Jisco’s shareholders.
•
•
•
Total paid-up capital of JVSL after merger but before
allotment of warrants will be Rs 129 cr.
JVSL will also have by then issued 1.15 cr. Warrants
to its original shareholders that give the right to each
warrant to get converted into 1 equity share at Rs
160 each.
Post exercise of warrants, JVSL’s paid up equity
capital will rise to Rs 140.5 cr. consisting of 14.05 cr.
shares of Rs 10 each, out of which:
1. 9.65 cr. (68%) shares will belong to its shareholders
(including lenders who got shares through conversion of
debt as well as warrant-holders who have converted their
warrants); and
2. 4.4 cr. (32%) shares will belong to JISCO’s shareholders.
• Step # C: Name change
– JVSL will now change its name to JISCO!!
• WHY????
– Structuring the transaction in this manner saves the
combined entity Rs 74 cr.!!!
– If JVSL (the larger company) was merged into JISCO (the
smaller company), then stamp duly will come to Rs 83.5 cr.
– Under the present structure, stamp duty comes to Rs 9.5 cr.
“What's in a name? That which we call a
rose by any other name would smell as
sweet.”- Romeo and Juliet.
Merger Ratio
•
Sources of Value Creation:
1. Scale.
2. Integration of operations.
–
–
–
Is there a backward integration angle?
Can we say that since Jisco buys HRC from JVSL, the
combined entity will save money?
Answer: No, since the cost of one is the revenue of the other
one. However, if there was any sales tax, then savings in that
would create value.
– However, there is no sales tax.
3. Enhanced financial strength and flexibility.
–
The cost of debt of the merged entity will be lower than the cost
of debt of JVSL.
4. Rationalisation of administrative and marketing cost.
5. Optimal utilisation of accumulated tax losses of JVSL by
consolidated entity.
–
Most important
• Post deal, Jisco will emerge as a company
with substantial debt (Rs 5,000 cr.), but with
healthy cash flows available to pay down
debt.
– It will be a good candidate for debt-pay down
theme of value investing.
• The company is a growing one:
– Galvanised steel capacity increased to 7.1 lac
tons by Dec 2003 from 5.5 lac tons.
– By 2005, HRC production expected to reach 2
million tons from 1.4 million tons.
• Opportunities:
– CDR in JVSL
– Merger arbitrage
• JVSL
• JISCO
– Creating cheap investment co shares
– Debt-reduction in combined entity
RULE OF MAXIMUM VALUE OF SENIOR ISSUES
A MIRROR IMAGE OF RULE OF MINIMUM VALUE OF A
DEBT-FREE COMPANY
THE VALUE OF THE STOCK OF A DEBT-FREE COMPANY
CANNOT BE LESS THAN THE VALUE OF BONDS IT CAN
EASILY SERVICE.
!
DEBT-CAPACITY BARGAINS
!
LBO CANDIDATES
!
LEVERAGED RECAPS – AMERICAN LAUNDRY
MACHINERY
"A SENIOR SECURITY CANNOT BE WORTH,
INTRINSICALLY, ANY MORE THAN THE EQUITY SHARE
WOULD BE WORTH IF IT OCCUPIED THE POSITION OF THAT
SENIOR SECURITY, WITH NO JUNIOR SECURITIES
OUTSTANDING.”- GRAHAM
THE AGGREGATE FAIR VALUE OF ALL SENIOR
SECURITIES OF A COMPANY CANNOT BE MORE THAN
THE VALUE OF THE ENTIRE COMPANY, WITH IDENTICAL
ASSETS, WERE IT DEBT-FREE.
WHY THIS RULE MUST HOLD TRUE?
BECAUSE, SENIOR SECURITY HOLDERS, CANNOT, IN AGGREGATE,
GET MORE OUT OF A COMPANY, THAN THEY COULD, IF THEY OWNED
THE ENTIRE COMPANY, FREE OF ALL PRIOR CLAIMANTS I.E. DEBTFREE.
“THE RULE OF "MAXIMUM VALUATION FOR SENIOR ISSUES"
ARISES OUT OF THE COMMON SENSE PRINCIPLE THAT THE SENIOR
CLAIMHOLDERS (BONDS AND PREFERRED STOCKS) CANNOT
POSSIBLY GET MORE OUT OF A COMPANY BY VIRTUE OF THEIR
FIXED CLAIM THAN THEY COULD REALIZE IF THEY OWNED THE
BUSINESS IN FULL, FREE AND CLEAR.”- GRAHAM
“THIS RELATIONSHIP MUST HOLD TRUE REGARDLESS OF HOW
HIGH THE INTEREST OR THE DIVIDEND RATE, THE PAR VALUE OR
THE REDEMPTION PRICE OF THE SENIOR ISSUE MAY BE, AND,
PARTICULARLY, REGARDLESS OF WHAT AMOUNT OF UNPAID
INTEREST OR DIVIDENDS MAY HAVE ACCUMULATED.”- GRAHAM
SUPPOSE THAT A COMPANY HAS IN
ISSUE, PREFERENCE SHARES HAVING A
FACE VALUE OF RS 300 CR., NO DEBT,
AND STATED NET WORTH OF RS 200 CR.
PREFERENCE SHARES ARE DUE FOR
REDEMPTION IN 3 YEARS.
PROMISED DIVIDEND ON PREFERENCE
SHARES IS 10% P.A., BUT NO DIVIDEND
HAD BEEN PAID FOR THE LAST FIVE
YEARS.
THEREFORE, ACCUMULATED DIVIDENDS
AMOUNT TO RS 150 CR.
BECAUSE THE COMPANY HAS DEFAULTED
ON DIVIDEND PAYMENTS, THE
PREFERENCE SHARES ARE SELLING IN
THE MARKET FOR A TOTAL VALUE OF RS.
180 CR.
THE EQUITY SHARES ARE SELLING IN
THE MARKET FOR A TOTAL VALUE OF RS
50 CR.
THAT MEANS THAT IF THE COMPANY
TURNS AROUND THEN THE POTENTIAL
PAYMENT TO PREFERENCE
SHAREHOLDERS AT REDEMPTION TIME
COULD BE RS 540 CR., THE PRESENT
VALUE OF WHICH IS APPROXIMATELY RS
355 CR. (15% DISCOUNT RATE).
THE COMPANY IS EXPECTED TO TURN
AROUND.
YOU HAVE ESTIMATED THE CURRENT
FAIR VALUE OF THE BUSINESS TO BE RS
250 CR.
WHAT IS THE VALUE OF THE
PREFERENCE SHARES TODAY?
BANKRUPTCY WORKOUTS
WHY WORTH LOOKING AT BANKRUPT COMPANIES?
PAVLOVIAN MIS-ASSOCIATION - THROWING THE BABY
OUT WITH THE BATH WATER
NOIDA TOLL BRIDGE - WHAT WILL HAPPEN TO THE
BRIDGE OVER TROUBLED WATERS?
A “BOOTALICIOUS DEAL!”
Gesco Corporation
What is a Spinoff?
Why should sum of the parts be
more than whole?
Different Prospects
Conglomerate Discount
Incentives
Access to Capital
Why Spinoffs are Often
Mispriced?
Materiality
Behavioral Reason
Information
Spinoff of Gesco Corp.
Took place in early 2000
Reason was Family Settlement
Part of the fixed assets are income
producing
Earning stream is of very high quality
Growing stream
Highly Predictable
How to value this income stream?
Part of fixed assets are not producing any
income.
Not NPAs
They are valuable, but idle assets.
Capital WIP is an ongoing project which
will complete within an year or so.
At the moment it is not producing any
income.
Fixed assets are traded in a market of
their own and their value can be
independently verified.
Nehru Place Property
Total built-up area: 51,810.07 square feet.
The building is let out to various
multinational companies like Microsoft,
Cisco, Heinz, and Royal & SunAlliance.
The property managed by Gesco Corp.
The tenants pay Gesco Corp. a composite
sum which includes rent and maintenance
charges.
Nehru Place Property
Building has been constructed to
international quality standards, and has
been rated as one of the best commercial
buildings in New Delhi by an international
property consulting firm and has been
rated as class "A".
Bhikaji Cama Place Property
Total built-up area: 54,973.35 square feet.
Most of the floors are let out to Erricson at
Rs 150 per square feet per month.
The lease deed also provided for an escalation
of 25% on the rent on every extension of three
years.
Bhikaji Cama Place Property
The property is managed by Knight Frank, a
company in which Gesco Corp. had a 16% stake
This building too has been ranked as one of the
best commercial complexes in Delhi by Richard
Ellis.
Valuation of two properties
We now knew the rents being paid by tenants
of both the Delhi properties to Gesco.
In case of the Bhikaji Cama Place property, this
was Rs 125 per square feet per month, and in
case of Nehru Place property, this was Rs 95
per square feet per month.
The annual rental revenue from the Bhikaji
Cama Place property came to Rs 8.24 cr.
The annual rental revenue from Nehru Place
property came to Rs 5.90 cr.
The total rental income came to Rs 14.14 cr.
This tallies with the income statement of the
company according to which the total income from
operation of commercial complexes was Rs 14.09 cr.
and the business centre revenues were Rs 0.68 cr.)
We were have also informed through market
sources, that both the properties were fully
leased and the typical lease term is either 6+3
years or 3+3 years, with escalation clauses of
25% after every three years which translates
into an annual increase in rents of 7.8%.
If we ignore the escalation clauses built into
the lease agreements for the above two
properties, and further assume that the quality
of tenants will remain unchanged, then the
annual rental income of Rupees 14.14 cr from
these properties would resemble coupon
payments on a high-grade, perpetual
corporate bond.
At that time, such a bond would produce a
yield-to-maturity of 12% per annum (implying
a multiple of 8.33).
Using this capitalisation factor of 8.33, which we
felt was extremely conservative, given the
location and the quality of these properties, the
value of these properties came to Rs 117.78 cr.
Notice, however, that this valuation ignores:
The increase in value due to rent escalation clauses. If
we assume a perpetual growth of only 3% p.a. in
rents, then the value of these two properties becomes
Rs 157 cr.
The reduction in value due to a clause in agreement
with DDA which requires that 50% of unearned
increase is to be surrendered to DDA.
The presence of this clause will have an impact
on the resale value of the property but will have
no impact on the earning power value because
the earning power value is based on rents which
are unaffected by the presence of this clause.
If both the above points are taken into account, it
is, in our opinion, safe to assume a minimum
earning-power value of Rupees 100 crore for
these properties. This valuation of Rupees 100
crore for both properties translates into Rupees
9,364 per square feet.
Now we can compare this earning-power
valuation figure of Rupees 9,364 per square
feet with that of the prices fetched by other
commercial properties in Delhi.
According to Knight Frank, the outright
prices for non-prime commercial properties
in various commercial business districts of
Delhi were as under:
Connaught Place: Rs. 7,000-9,000 per sq. ft.
Bhikaji Cama Place: Rs. 3,500-4,000 per sq. ft.
Nehru Place: Rs. 3,500-4,000 per sq. ft.
Rajendra Place: Rs. 3,000-3,200 per sq. ft.
South Extension: Rs. 4,500-5,000 per sq. ft.
Gurgaon: Rs. 2,500-3,500 per sq. ft.
According to Knight Frank, "A" grade
buildings in these areas having power back
up, air-conditioning, latest fire fighting
equipment etc., were quoted at significantly
higher rates than the above rates.
In fact, on our enquiries from market sources,
class "A" retail trade buildings in Delhi were
commanding outright sale prices as high as
Rupees 15,000 per square feet (in Ansal Plaza,
for instance).
The price range for class "A" properties in
commercial centres of New Delhi (such as
Connaught Place, Nehru Place, and Bhikaji
Cama Place), according to market sources
range from anywhere between Rupees 9,500 to
Rupees 10,000 per square feet.
Therefore, our earning-power estimate of
Rupees 9,364 per square feet appeared to be
reasonable, considering the prevailing market
rates of such properties in New Delhi.
Indeed, in our discussions with various property
brokers in Delhi, it has emerged that the sale value
of both the Gesco properties is in the region of Rs
12,000 to Rs 15,000 per square feet. However, we
stuck to our conservative valuation of Rs 9,364 per
square feet.
Summary of valuations of both the Gesco Corp.
Properties:
Great Eastern Center, Nehru Place, New Delhi:
Rupees 49 cr.
Great Eastern Center, Bhikaji Cama Place, New
Delhi: Rupees 51 cr.
Valuation of Capital WIP
Gesco Corp. took over capital workin-progress valued at Rupees 22.9
crore from Great Eastern Shipping.
A very substantial part of this capital
work-in-progress was attributable to
Great Eastern Plaza, Pune, one of the
premium commercial complexes.
Located on the main airport road, this
building boasts of the following: (1) Granite
and glass facade; (2) Full air-conditioning; (3)
Full power back-up; (4) Infrastructure for
satellite connectivity; (5) Two tier car parking
space; (6) Total area of 140,000 square feet in
two phases- Phase one of 70,000 square feet
is complete; (7) Constructed by Singapore
Infrastructure Technologies.
The scheme of arrangement between Gesco and
Great Eastern Shipping mentions that the total
area of the property owned by Gesco is 8,499.32
square meters. Elsewhere, it has been mentioned
that the total area of 140,000 square feet was to be
built in two phases of 70,000 square feet each, out
of which phase one of 70,000 square feet is now
complete.
EIH Ltd has built a Trident Hotel in the same complex.
As on 31 March 2,000, Gesco Corp's total capital
work-in-progress was valued at Rupees 30.47
crore.
The components of this capital work-in-progress,
apart from GE Plaza, Pune were not known. What
was known, however, is that phase one of GE plaza
consisting of 70,000 square feet of prime commercial
property is now complete.
According to Knight Frank, the current outright sale
value of prime commercial property in Pune was
approximately Rupees 4,000 per square feet.
Although, given the quality and location of GE
Plaza, its outright sale value ought to be somewhat
higher than Rupees 4,000 per square feet, we were
conservative and taken the value quoted by Knight
Frank.
On that basis, the value of phase one of GE Plaza comes to Rupees
28 crore. Further, if we assume that the remaining components of
Gesco Corp's capital work-in-progress have a value of at least
Rupees 2.47 crore, the whole of the capital work-in-progress on the
balance sheet of Gesco Corp. as on 31 March 2000 would be valued
at cost of Rupees 30.47 crore.
This Rupees 30.47 crore value appears to be conservative
because: (1) it assumes a zero return on funds invested by the
company in capital work-in-progress; and (2) it assumes zero
value for the remaining portion of the premises of GE Plaza
where phase two comprising of 70,000 square feet of prime
commercial property is to be built.
Valuation of Bangalore Property
The property comprises of 9,223 square feet of
leased commercial property called Great
Eastern Plaza in Bangalore.
According to Knight Frank, the current
outright sale value of prime commercial
property in Bangalore was approximately
Rupees 4,000 per square feet.
On this basis, the value of GE Plaza, Bangalore
came to Rupees 3.68 cr.
Valuation of Residential Properties
Since there was no rental income from residential
properties none of these properties are
contributing to the operating earnings of the
company.
This does not mean that the properties are vacant.
In fact, the document on scheme of demerger mentions
that the five flats in Belvedere are occupied by
employees (of, presumably, Great Eastern Shipping).ere
Court is reputed to be one of most beautiful residential
buildings in Mumbai.
According to Knight Frank, one flat in Belvedere Court
was recently sold for Rupees 2.15 cr. at a rate of Rupees
10,250 per square feet.
To be on the conservative side, we assumed a value of
only Rupees 1.75 cr. for each of the five flats owned by
Gesco Corp. in Belvedere Court.
Total value of these five flats, therefore, came to Rs 8.75
cr.
Belvedere
Court
• India’s tallest residential
apartment complex
• A bow-shaped, 40-storey,
international style
skyscraper, comprising of 3
and 4 bedroom luxury
duplex apartments.
• Situated at Mahalaxmi in
Central Mumbai
• Gesco build this property
and owned 5 flats.
Belvedere
Court
Gesco Corp. also owns five more flats in
Mumbai, each of which have been
conservatively valued at Rupees 50 lacs.
Finally, the company owns one flat in
Bangalore, which we are valuing at Rupees 25
lacs.
The total value of the residential properties,
which were taken over by Gesco from Great
Eastern Shipping comes to Rupees 11.50 cr.
In addition, the company has spent Rupees
9.09 cr. to its residential property portfolio
subsequent to the acquisition of properties
from Great Eastern Shipping under the
scheme of demerger.
Assuming the value of newly added
properties to be at least equal to 100% of the
cost of creating them, the minimum value of
residential properties of Gesco Corp. comes to
Rupees 20.59 cr.
Valuation of Administrative
Offices
The corporate headquarters of Gesco Corp. is
located in the World Trade Center, Cuffe Parade,
Mumbai.
The company owns the premises.
We took an arbitrary value of Rupees 5 cr. for this office.
The company also owned three offices in Pune and
one office in Banglore. Each was assigned an
arbitrary value of Rs 25 lacs.
Therefore, the total value of the administrative
offices of Gesco Corp. comes to Rupees 5.75 cr.
Property Valuation Summary
Great Eastern Center, Nehru Place, New Delhi: Rs.
49.00 cr.
Great Eastern Plaza, Bhikaji Cama Place, New
Delhi: Rs. 51.00 cr.
Capital Work-in-Progress including Great Eastern
Plaza, Pune: Rs 30.47 cr.
Great Eastern Plaza, Banglore: Rs. 3.68 cr.
Residential Properties: Rs 20.59 cr.
Administrative Offices: Rs. 5.75 cr.
TOTAL VALUE = Rs 160.49 cr. (Book value 118 cr.)
Valued at Rs 160 cr.
Valued at Rs 37 cr.
Valued at Rs -7 cr.
Rs 160 cr. + Rs 37 cr. – Rs 7 cr. = Rs 190 cr.
The company has 2.87 cr. Shares. Value/ share = Rs 66 per share.
Conservative [MARGIN OF SAFETY]
Let us now introduce an additional element of
MARGIN OF SAFETY.
At what price per share would you call this
hypothetical company’s stock a “screaming
bargain”?
What is the cash per share?
Rs 37 cr./2.87 cr. = Rs 12.89 per share?
What would you do if this stock became
available at Rs 9 per share?
What if the “Efficient” Market valued
this entire company for Rs 26 cr.?
What would you do?
Don’t answer yet before you get the next
bit of information!
What if, in this company, the promoters
were holding a stake of 11% and the rest
of the shares were out in the market?
Now, what would you do?
Then, what will you do?
Thank you
Eicher Motors
“This agreement provides a very solid platform for further growth
on the Indian market for heavy trucks, which is the fourth largest
in the world. India is investing heavily in improving its
infrastructure and together with Eicher we have highly favorable
conditions to further strengthen our position on the Indian market.”
Leif Johansson, CEO, Volvo Group
”This is a win-win deal,” says Eicher Motors Limited’s
CEO Siddhartha Lal. We are looking forward to
working with Volvo and to become a member of the
largest global commercial vehicle alliance in the world.
With Volvo’s strong brand recognition and support in
products, technology and ﬁnancial strength, we will be
well positioned to further develop our brand and oﬀer
in India.” — Siddharth Lal, CEO, Eicher Motors
Eicher Motors
Subsequent Developments
Mr. Market Sleeps through all this...
Mr Market does not WANT to wake up
Mr. Market wakes up
Thank You

Cases in Value Investing

Transcription

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