Saturday, February 11, 2006

Hidden Value - Sundaram Clayton

Sundaram Clayton Limited's balance sheet throws the following numbers -
Equity - 18.97 crs
Loans - 109.18 crs
Investments - 57.08 crs
NCA - 16.96 crs
PAT - 70.71 crs
FV - 10 rupees per share
Dividend - 9 rupees per share
CMP - 854 rupees per share (10-Feb)

A fairly expensive stock, whose valuation from our perspective would read -
1) NCAV of negative 48.61 rupees/share
2) Dividend yield of 1.05%
3) PE of 22.64; fwdPE of 17.79 rupees/share

However notice two items here -
[A] The market capitalization ... 854 rupees/share multiplied by 1.896 crores shares equals 1,619 crores
[B] The investments in the balance sheet reads 57.08 crores.

This is the most interesting. Apparently, SCL and it's subsidiaries have a significant portion of it's investments in the TVS Motor Company. To be precise, we are looking at - 135,000,000 shares of TVS Motors that SCL holds. (thats 56.83% of TVS Motors). Multiply these 135,000,000 shares with the current price of Rs. 120.45 per share (Feb 10) and you'll find that SCL holds investments worth a huge Rs. 16,260,750,000 from TVS Motors alone. i.e. 1,626 crores.

Which means, firstly the investments shown in the books of SCL of 57.08 crores are a pittance when we calculate the same, with the current market price and secondly, the value of the shares of TVS Motors that Sundaram Clayton holds is more than the market capitalization of Sundaram Clayton itself.

Surprisingly SCL values these investments at their face value (cost) rather than the market value. It's list of quoted investments include (other than TVS Motors) - 34,346 shares in ICICI Bank Ltd., 69,740 shares in HDFC Ltd., 500 shares in HDFC Bank Ltd. .. this itslef amounts to 115,833,904 (11.58 crores) as on Feb-10 '06. These shares have been valued by SCL at an amount of 1,045,000 rupees (10.45 lacs) ... i.e. at 0.902% it's actual value

But the fact that TVS Motors in SCL is greater than SCL itself is crazy !!! Yet true. This is like me paying a 'fairly evaluated' price for a cow, only to discover that it's pregnant with a couple of calves.

15 Comments:

Blogger Shankar said...

As a followup to this post, do read about Ben Graham's exploits with the Guggenheim Exploratin Company. (pg 9)

The document is available at -
www.econ.duke.edu/Journals/DJE/dje2000/bierig.PDF

Warm Regards, Shankar

11:59 PM  
Anonymous Sreenath Vemulapalli said...

Shankar - I really enjoy reading your blog. Keep up the great writing.

Question about your post on the 11th regarding Sundaram Clayton - pgs. 32 & 44 of the Annual report seem to indicate that it owns 21,000,000 shares of TVS Motor Co. rather than 135,000,000. Can you tell me where you got your figure (I noticed that the other #s were the same that I was reading). The point remains that the company is listing investments at cost - but trying to figure out the size of this "margin of safety".

Also - I'm from the US and don't know much regarding the competition, etc. - are there some good sources you could recommend for doing general research on Indian stocks? Are you planning on investing on this oppurtunity or still doing further research?

Thanks again & will keep reading.

7:28 AM  
Blogger Shankar said...

Hi Sreenath,

Thanks for the compliments. Here are some answers to your queries -

a) The B/S says 21,000,000 shares of TVS Motors, as held by SCL. This is true. But look at pg 63 of the annual report. SCL has an 8.84% direct holding in TVS Motors and a 47.99% indirect holding (from its subsidaries). That takes up the holding to 56.83% of TVS Motors

b) This itself is my biggest margin of safety. Imagine writing a 1629 crore opportunity as a 58 crore pittance. .... A company within a company .... So, excluding the profits and the assets of SCL and it's subsidaries ... I still say that SCL's m-cap is fairly valued just on the basis of it's TVS holding. Pl do me a favour, try to arrive at the enterprise value of SCL. (Sreenath, what my research discovered is HIDDEN VALUE ... which is not visible to the naked eye)

c) The fwdPE is around 17. I shall not be too uncomfortable buying this scrip but would take minimal qty and buy more on drawdowns. I like the management and it's outlook - pg 14/15.

d) Good sources to continue research -
1. Read company annual reports (use www.sebiedifar.nic.in)
2. ICICIdirect.com
3. myiris.com

Warm regards, Shankar

6:33 PM  
Anonymous Sreenath Vemulapalli said...

Thanks for clarifying SCL holdings for me. From a long term holding perspective this value has to be realized, but what concerns me is that apparently others have caught on to this discrepancy as early as 2002, but it still remains heavily undervalued:
http://www.myiris.com/shares/research/bin/showRep.php?redir=/shares/research/choksey/SUNCLAYT_20020918.htm&linkfrm=htm&brokercode=KRC%20Research&code=Sundaram-Clayton%20Limited

In time, and given a catalyst this has to be corrected. I will look into the EV of the company (please take my feedback with a grain of salt, I'm very new to evaluating stocks).

12:14 AM  
Blogger Rohit said...

you may want to look at eicher holding. it seems to a stock similar to SCL. Has holding in eicher motors. i dont know the latest, but at one point their market value was less than the holding alone
rohit

7:40 PM  
Blogger Vishal Mittal said...

Hi,

My experience with such stocks with hidden value (unlikely to be monetized in near future) is that such stock require a catalyst. Thus though they are safe, but will take time to give results and thus can lower annual yield. So i normally look for a compensation - either in terms of good dividend yield (>4-5%) or be 25 cents on the dollar (rather than 60 cents on dollar for normal value stock since i assume 3-4 years of holding period).

Rgds

7:54 PM  
Blogger jagadish said...

Hi,
Holding cos are a tough play. It needs lot of patience as mkt takes lot of time to realize the real value, unless there is a catalyst. I have been looking into holding cos for the past one year, most of them (holding cos with out their own operations) trade at 50% discount to NAV (net asset value, computed using only direct holdings). As my experience goes, very few trade at higher valuations, for example Rane holdings trades at just 25% discount to NAV, other like Eicher, JSW holdings and Balmer Lawrie trade at 50% discount to NAV. Nawal sons has its own operations hence discount to NAV is not meaning full.

Regarding catalyst, Consolidated finvest was one where realization of fair value happened quite fast. As you all might know, Management didn’t do any thing there, neither its investment in jindal poly (jindal poly price is actually down by % in 2005). It all happened bcoz of Blogs, many retail investors will be familiar with detailed reports available on consolidated finvest.

I invest in holding cos if they trade at more than 50% discount to NAV. Investment in consolidated finvest was made by me at Rs 33, when it was trading at 60% discount to NAV. Now one stock which is trading at such steep discount is Vardhman spinning(75% discount to NAV). The biggest risk in this stock is its piss poor liquidity and there is no catalyst to move the price.

One holding co, which has catalyst, and trading at 50% discount is KEC international, but the discount is not sufficient to take a big position.

Regards,
jagadish

12:35 PM  
Blogger Vishal Mittal said...

Hi Jagdish,

i read a report on consolidated finvest.. but it talked about holding value of Rs. 440...But your analysis talks about Rs. 55 ?? is this because of direct vz. indirect holding or some other reason ?

Rgds

Vishal Mittal

3:44 PM  
Blogger jagadish said...

Yes Vishal, the difference in fair value is bcoz, i took only direct holdings which were worth around Rs 160 per sahre that time(jindal poly price dropped eventually), and applying a 50% discount fair value that time came to Rs80, thats how my acq price of 33 was 60% discount to fairvalue of 80.

regards,
jagadish

4:19 PM  
Blogger Shankar said...

Jagadish/Vishal, i've observed that although discovering latent value in a stock is very good - it's SAFER to classify it as a feel-good or a margin of safety during your research. This is the movement in philosophy from Graham to Buffet ... were Buffet laid more emphasis on management and P/E ratios rather than stricter NCAV and debt recap methods.

Warm Regards
Shankar

10:20 PM  
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